- Bank of England warns rising energy prices and AI debt increase financial stability risks
- Likelihood of interconnected financial shocks has grown, says Bank of England's FPC
- Middle East conflict fuels prolonged supply shocks, pushing bond yields to 2008 levels
The Bank of England has warned that risks to financial stability are becoming more pronounced as higher energy prices, rising bond yields and growing exposure to AI-related debt and assets add to vulnerabilities across financial markets.
In its latest Financial Policy Committee assessment on Wednesday, the central bank said the likelihood of interconnected financial vulnerabilities crystallising into a broader market shock had increased. It kept the Countercyclical Capital Buffer at 2%, with the financial system and equity markets remaining resilient so far, Reuters reported.
The renewed escalation of the conflict in the Middle East has emerged as a major concern. Higher oil, gas and refined-product prices are creating a more prolonged supply shock, according to the BoE. The resulting increase in borrowing costs has pushed bond yields to levels not seen since 2008.
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The central bank is also paying closer attention to the rapid expansion of debt and financing linked to artificial intelligence. It said rising AI-related borrowing has increased capital-market exposure to developments in the sector.
Morgan Stanley estimated that global AI-related debt issuance had reached about $450 billion, roughly double the 2025 level.
The BoE cautioned that AI and semiconductor stocks have already experienced sharp declines, while elevated valuations could leave markets vulnerable to a more severe repricing if investor sentiment changes abruptly.
Governor Andrew Bailey separately called for rigorous testing of frontier AI models before and after deployment. He said understanding how these systems behave and identifying credible intervention points should come before a formal regulatory framework.
Bailey also pointed to recent incidents involving AI systems bypassing safeguards as evidence of growing cyber and operational risks.
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The BoE also outlined a timetable for changes to bank leverage rules and the gilt repo market. More detailed proposals are expected in early 2027, followed by a consultation.
The central bank said improving resilience in the gilt repo market remains important given its role during periods of financial stress.
BoE data puts net borrowing in the gilt repo market at around £200 billion, while hedge-fund leverage has remained high but broadly stable. The bank said some of the proposed reforms could take years to fully implement.
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