The AI boom is increasing global demand for capital and has central bankers bracing for a period of higher interest rates. Investments in chips, data centers, power grids and telecommunications are boosting economic activity but creating inflationary pressures even before the promised productivity gains are realized.
“If you are a central banker, you have to admit that this is a shock,“ said Federal Reserve Chairman Kevin Warsh at the annual meetings of the International Monetary Fund and World Bank in Bangkok. He said demand is increasing ahead of supply, which could make the transition to the new economic model “very uneven.”
Investments are making capital more expensive
Central bankers from major economies have said that even a small shift in expectations about the benefits of AI could cause major disruptions in financial markets. Asian technology companies have been selling off this week, and investors are reassessing the scale and returns of AI projects.
“There is a global race for money,” European Central Bank Governing Council member Martins Kazaks told Reuters. He said investments in AI are among the main factors driving up the cost of capital. The Federal Reserve and the ECB raised interest rates in September, and markets are already expecting another hike in December.
Pressure on governments and public debt
The prospect of structurally higher borrowing costs is putting additional constraints on governments that have accumulated significant debt in years of near-zero interest rates. Government bond yields have risen in a number of countries, reaching levels in some markets not seen since before the global financial crisis.
The eurozone is among the most vulnerable regions, with France singled out as a case in point for its high debt and strain on public finances. ECB President Christine Lagarde said that for France, “the first decision lies at home” and is related to fiscal policy. She also noted the additional inflationary pressure from higher energy costs linked to the wars in Iran and Ukraine.
The risk of a sharp change in expectations
The majority of investment fueled by artificial intelligence is concentrated in the United States, and to a lesser extent in Japan and other Asian economies. In Europe, among the few companies that directly benefit from the trend are ASML and “Siemens“.
Japan has already cited demand related to artificial intelligence as one of the factors behind its recent interest rate hikes. For central banks, the key question is whether the investment boom will lead to a lasting increase in productivity or will initially support excessive demand, higher inflation and more expensive financing.
Sources: reuters.com