Central bankers in Bangkok say AI investment boom is pushing up borrowing costs

Central bankers from major economies said at the IMF and World Bank annual meetings in Bangkok that heavy investment in artificial intelligence is adding to demand for capital and could keep interest rates higher, Reuters reported on Friday 16 October.

Officials said the spending on chips, data centres, power grids and telecoms networks is creating inflation pressure and financial risks because it is arriving before the productivity gains AI promises, Reuters said.

“If you’re a central banker…you’ve got to recognise this as a shock,” US Federal Reserve Chair Kevin Warsh said. “It’s obviously hitting the demand side of the economy before it’s going to hit the supply side.”

“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.”

South African Reserve Bank Governor Lesetja Kganyago said the neutral interest rate, the level that neither speeds up nor slows down an economy, is harder to estimate. “We know that R-star is higher, but we do not know how high,” he said. Bank of England Chief Economist Huw Pill said: “Maybe rates, on average, will be that little bit higher.”

Reuters said heavy government borrowing for defence, industrial policy and energy is adding to the pressure, and that sovereign bond yields in some countries have reached levels last seen before the global financial crisis. ECB President Christine Lagarde said France’s situation had to be solved “at home in France” through fiscal policy.

Economists expect the Bank of England to raise rates at its next meeting on 5 November, Reuters reported. The Fed and ECB raised rates in September.