Central bankers eye higher rates as AI boom fuels scramble for cash
Synopsis
The surge in artificial intelligence is sparking worldwide investments while simultaneously elevating borrowing rates for both governments and businesses. Central bankers are acknowledging a rising need for capital, prompting possible alterations in interest rates. Countries such as the United States and Japan are witnessing increased AI investments, whereas the euro zone battles with escalated energy expenses. This influx of funds could trigger inflation before any notable productivity benefits materialize.
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Reuters
The artificial intelligence boom is setting off a global race for money, forcing central bankers to contemplate a future in which interest rates stay higher and governments need to tighten their belts after an era of largesse.
From silicon chips and data centres to power grids and telecoms networks, governments and companies are pouring money into projects tied directly or indirectly to AI, adding fuel to the global economy and pushing up borrowing costs.
Central bankers from the world's largest economies gathering in Bangkok said the boom was also creating fresh inflation pressures and financial risks, because the investment is arriving long before the productivity gains AI promises.
"If you're a central banker...you've got to recognise this as a shock," Federal Reserve Chair Kevin Warsh said at the annual meetings of the International Monetary Fund and World Bank in Bangkok. "It's obviously hitting the demand side of the economy before it's going to hit the supply side."
Warsh, who said the US was benefiting from a broadening "surge of investment", warned the transition could be "very bumpy" as investors, companies and policymakers grappled with a technology whose ultimate winners remain unclear.
Several of his colleagues from the G20 group of large economies also in the Thai capital said it would only take a slight reassessment of the rosy earnings prospects underpinning AI investments to cause profound market ructions, as a selloff in Asian tech stocks showed this week.
Stars behind the clouds
The debate marks a striking shift from the years following the 2008 financial crisis, when policymakers worried about excess global savings and inflation that was persistently too low.
Now central bankers increasingly see the opposite problem: too much demand for capital.
"There is a global fight for money," ECB policymaker Martins Kazaks told Reuters. "Investment in AI is one of the key factors driving up the cost of money."
That pressure is being amplified by governments from the United States to Japan and Germany borrowing heavily for defence, industrial policy and energy projects.
For central bankers, the implication is that the level of interest rates needed to keep economies on an even keel, known as R-star, may be rising.
"The problem at the moment in calculating the R-star is that the stars are covered by the clouds, and the clouds are so thick," South African Reserve Bank Governor Lesetja Kganyago said. "We know that R-star is higher, but we do not know how high."
A higher neutral rate means the same level of interest rate is less restrictive than previously thought.
"Maybe rates, on average, will be that little bit higher," said Bank of England Chief Economist Huw Pill.
The Bank of Japan has already cited AI-related demand as a factor behind its recent rate increases, arguing that investment-driven price pressures have become broader and more persistent.
Economists expect the Bank of England to raise rates at its next meeting on November 5. The ECB and Fed raised rates in September, and markets have priced in another move by them both in December.
No more cheap money
The prospect of structurally higher borrowing costs poses a challenge for governments that built up large debts during years when interest rates hovered near zero.
Sovereign bond yields have risen across the world, and in recent weeks some have reached levels not seen since before the global financial crisis.
The euro zone, and notably debt-laden France, was seen as particularly exposed.
Much of the AI-driven investment surge is taking place in the United States and, to a lesser extent, Japan and other parts of Asia, with ASML and Siemens among the few clear European winners.
Meanwhile, the bloc faces higher energy costs from wars in Iran and Ukraine, compounding inflation pressures and squeezing public finances.
"There are particular circumstances that lead to some countries being more affected, France being a case in point," ECB President Christine Lagarde said at a CNN event in Bangkok. "And for that one, the primary and first solution lies at home in France. And it has to do with fiscal policies."
From silicon chips and data centres to power grids and telecoms networks, governments and companies are pouring money into projects tied directly or indirectly to AI, adding fuel to the global economy and pushing up borrowing costs.
Central bankers from the world's largest economies gathering in Bangkok said the boom was also creating fresh inflation pressures and financial risks, because the investment is arriving long before the productivity gains AI promises.
"If you're a central banker...you've got to recognise this as a shock," Federal Reserve Chair Kevin Warsh said at the annual meetings of the International Monetary Fund and World Bank in Bangkok. "It's obviously hitting the demand side of the economy before it's going to hit the supply side."
Warsh, who said the US was benefiting from a broadening "surge of investment", warned the transition could be "very bumpy" as investors, companies and policymakers grappled with a technology whose ultimate winners remain unclear.
Several of his colleagues from the G20 group of large economies also in the Thai capital said it would only take a slight reassessment of the rosy earnings prospects underpinning AI investments to cause profound market ructions, as a selloff in Asian tech stocks showed this week.
Stars behind the clouds
The debate marks a striking shift from the years following the 2008 financial crisis, when policymakers worried about excess global savings and inflation that was persistently too low.
Now central bankers increasingly see the opposite problem: too much demand for capital.
"There is a global fight for money," ECB policymaker Martins Kazaks told Reuters. "Investment in AI is one of the key factors driving up the cost of money."
That pressure is being amplified by governments from the United States to Japan and Germany borrowing heavily for defence, industrial policy and energy projects.
For central bankers, the implication is that the level of interest rates needed to keep economies on an even keel, known as R-star, may be rising.
"The problem at the moment in calculating the R-star is that the stars are covered by the clouds, and the clouds are so thick," South African Reserve Bank Governor Lesetja Kganyago said. "We know that R-star is higher, but we do not know how high."
A higher neutral rate means the same level of interest rate is less restrictive than previously thought.
"Maybe rates, on average, will be that little bit higher," said Bank of England Chief Economist Huw Pill.
The Bank of Japan has already cited AI-related demand as a factor behind its recent rate increases, arguing that investment-driven price pressures have become broader and more persistent.
Economists expect the Bank of England to raise rates at its next meeting on November 5. The ECB and Fed raised rates in September, and markets have priced in another move by them both in December.
No more cheap money
The prospect of structurally higher borrowing costs poses a challenge for governments that built up large debts during years when interest rates hovered near zero.
Sovereign bond yields have risen across the world, and in recent weeks some have reached levels not seen since before the global financial crisis.
The euro zone, and notably debt-laden France, was seen as particularly exposed.
Much of the AI-driven investment surge is taking place in the United States and, to a lesser extent, Japan and other parts of Asia, with ASML and Siemens among the few clear European winners.
Meanwhile, the bloc faces higher energy costs from wars in Iran and Ukraine, compounding inflation pressures and squeezing public finances.
"There are particular circumstances that lead to some countries being more affected, France being a case in point," ECB President Christine Lagarde said at a CNN event in Bangkok. "And for that one, the primary and first solution lies at home in France. And it has to do with fiscal policies."
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