Central bankers say AI boom is lifting borrowing costs

Central bankers meeting in Bangkok this week said the artificial intelligence investment boom has set off a global competition for capital. In their view, it could hold interest rates higher for years and force governments to rein in spending after a long period of cheap borrowing, Reuters reported Friday, October 16. The officials said spending on chips, data centers, power grids and telecom networks is adding to demand and pushing up borrowing costs. They added that the money is arriving well before AI delivers the productivity gains it promises.933thedrive.com

"If you're a central banker…you've got to recognise this as a shock," Federal Reserve Chair Kevin Warsh said at the IMF and World Bank annual meetings. "It's obviously hitting the demand side of the economy before it's going to hit the supply side," he added, according to Reuters.reuters.com

A 'global fight for money'

The debate reverses the worries that followed the 2008 financial crisis, when policymakers were concerned about too much global saving and inflation that stayed too low. "There is a global fight for money," European Central Bank policymaker Martins Kazaks told Reuters. "Investment in AI is one of the key factors driving up the cost of money."reuters.com

Officials said the neutral rate, often called R-star, may be rising. "We know that R-star is higher, but we do not know how high," said South African Reserve Bank Governor Lesetja Kganyago. Bank of England Chief Economist Huw Pill said, "Maybe rates, on average, will be that little bit higher". The Bank of Japan has already cited AI-related demand as one reason for its recent rate increases. The Fed and the ECB both raised rates in September, and markets expect each to move again in December.933thedrive.com

Bond markets under strain

Sovereign bond yields have risen around the world, and some have recently reached levels not seen since before the global financial crisis, Reuters reported. In its Global Financial Stability Report, released Tuesday, October 13, the IMF warned that yields could rise in a "disorderly" way as inflation, debt and AI-related borrowing put pressure on bond markets. The fund said hyperscalers now account for 10% of global investment-grade bond issuance, up from less than 1% in 2024. Much of that debt has long maturities that compete directly with government bonds for investors.cnbc.com+2

IMF Managing Director Kristalina Georgieva said yields in advanced economies have climbed "to multi-decade highs," in part because of higher expected growth linked to AI. She added that "now may be a good time for a prudent hawkish bias in many countries".imf.org

Europe exposed

Officials singled out the euro zone, especially France with its heavy debt, as particularly exposed. Most of the AI investment is flowing to the United States and Asia, while Europe faces energy costs driven up by the wars in Iran and Ukraine. Several G20 central bankers also warned that even a small downgrade of AI earnings expectations could shake markets, as a selloff in Asian tech stocks showed this week.933thedrive.com

"The primary and first solution lies at home in France," ECB President Christine Lagarde said. "And it has to do with fiscal policies".reuters.com