23 October 2026: Bailey warns over AI borrowing binge

Britain's manufacturing output is expected to stabilise over the next three months, despite a dip in October orders, according to a Confederation of British Industry survey. The -1 reading in the CBI's volume-of-output gauge for the next three months followed a run of flat or falling production that began in mid-2022. "But with orders still falling and labour shortages picking up, significant challenges remain," CBI senior economist Cameron Martin said.

"Stubbornly high costs, especially for energy, are also squeezing profitability, while deteriorating competitiveness and fragile business confidence continue to weigh on investment decisions." Official data show solid growth in Britain's manufacturing output this year.

The monthly order book balance fell to -32 in October from -9 in September, and the survey's quarterly gauge of output expectations for the months ahead improved to -1 from -30 in July. However, the quarterly measure of expected domestic prices rose to +24 from +11.

Andrew Bailey has warned that the AI industry’s historic borrowing levels pose a risk to financial stability.

The Bank of England Governor said “none of us knows” what a “bubble” in the sector would look like, but heavy leverage increases the risks.

“There is very large borrowing happening to support this innovation, to support this investment. I think on the AI front, the big issue now is what I call public trust,” he said, pointing to the debate over “the acceptable level of human control” of the technology.

That trust has been severely tested over the past 24 hours, after it was discovered that almost every website built using the programming language PHP may be susceptible to AI-powered hacking. PHP has suggested that users either apply a ‘patch they have developed’ or temporarily take their sites down.

He cautioned that financial stability could be affected if the world turns on the technology.

“If we lose public trust, or don’t establish public trust, then that is going to make the financial position look more precarious.”

The wave of AI optimism has powered stock markets to new highs and propped up both the US and UK economies over the past 18 months.

However, nerves have crept into the market in recent weeks amid concerns about the scale of borrowing needed to fund the AI boom and worries that demand will not meet expectations.

Shares in Australian data centre operator NextDC fell by more than 40pc on Wednesday after it said its latest project had been delayed. On Tuesday, shares in South Korean data centre company Elice Group dropped by more than 30pc on their first day of trading.

The sell-off has so far been limited to a small number of so-called “neoclouds”, AI-focused data centre operators that often rely heavily on debt.

The Bank of England is expected to overshadow John Healey’s maiden Budget with a “done deal” interest rate hike to curb soaring inflation, risking economic growth.

City economists predict the Bank’s Monetary Policy Committee will raise the base rate at its November meeting, just a week after the Autumn Budget. The Bank has kept rates unchanged at 3.75 percent since its last 25-basis-point cut at the end of 2025. However, hawks on the committee have called for a rate increase in response to the energy crisis triggered by the ongoing US-Iran conflict.

After Wednesday's inflation report, all barriers to a rate hike are expected to be removed. The inflation news, coming after stronger economic growth and a lower unemployment rate, ‘almost guarantees an interest rate hike next month.’

The pound was among the stronger-performing major currencies in global FX markets yesterday, supported by expectations of a UK rate hike and a weaker Euro. Reuters reported that sterling rose about 0.1% against the US dollar to around $1.34, outperforming most other European currencies.

A defining feature of Fed Chair Kevin Warsh's policy approach is that he has deliberately reduced forward guidance and avoids signalling future interest-rate decisions in advance.

The key point is that markets expect central banks to signal the likely policy path. Under Warsh, the Fed has moved away from that approach, offering less guidance on future rate moves and encouraging investors to focus on incoming economic data rather than Fed rhetoric.

For markets, this creates uncertainty, even though FOMC members, whether or not they vote on monetary policy, continue to provide their prognosis to markets. However, none has the ‘gravitas’ of the Chairman's words. Traders are less certain whether rates will rise, fall or stay unchanged at upcoming meetings.

Expectations can swing more sharply after inflation, employment or growth data releases. Bond yields, currencies and equities become more sensitive to economic surprises because investors cannot rely on Fed guidance to anchor expectations. Supporters argue that this "quiet Fed" approach forces markets to price assets based on economic fundamentals rather than Central Bank promises. Critics argue that it increases volatility and leaves households, businesses and investors with less clarity about the likely policy path.

The U.S. economy is not overheating despite strong artificial intelligence-related spending, said Robert Kaplan, Goldman Sachs vice chairman and former Dallas Fed president, in an interview with CNBC.

Kaplan argued that while AI capital expenditure is booming, other sectors of the economy, including housing, autos, and spending by low- to moderate-income consumers, remain sluggish, creating a more mixed economic picture than headlines suggest.

Kaplan contended that current inflation stickiness is more structural than cyclical, driven primarily by cost pressures such as the oil spike rather than excess demand.

"The danger for the Fed is if you hike too aggressively, you might not actually make a dent in inflation," he said. "It still may remain sticky because it's not a cyclical issue. It's a structural issue, but you might slow the economy and raise unemployment."

The former Fed president suggested the central bank should proceed cautiously with any rate increases, predicting the Fed will likely raise rates in December. "You want to go slowly and deliberately and be careful how far you go because of this mixed picture," Kaplan explained, noting that waiting gives time to see whether the oil situation improves.

Kaplan also warned that an immediate rate hike could backfire in an economy with debt-to-GDP exceeding 100%.

He noted that spreads for highly leveraged credits have widened recently, which he views as a healthy sign that markets are policing credit quality.

"Building in a risk premium in the Treasury market is a negative thing because it's very expensive given how much the Treasury needs to roll over these early maturities," he said.

According to an analysis by the Federal Reserve Bank of Minneapolis, research from Moody's Analytics estimates that the top 10% of U.S. households by income now account for more than 45% of spending, while the bottom 60% account for just 23%.

That figure is an estimate. The Minneapolis Fed analysis explains that Moody's works backwards from financial and wealth data to estimate savings, then counts the remaining income as spending—so it doesn't directly measure household spending.

In the Bureau of Labour Statistics' 2024 Consumer Expenditure Surveys, which asked households what they spend, the top 10% of households accounted for 23% of spending and the top 30% for more than half.

Moody's argues that high-income households systematically underreport spending in that survey.

A recent Federal Reserve Board analysis adds another angle. Based on the 2025 Survey of Consumer Finances, the top 10% of households by income accounted for about 28% of non-housing spending.

The top 10% of luxury spenders, measured by spending on restaurant meals, holidays, and new vehicles, accounted for about half of spending in that category. These are the kinds of purchases Leno was talking about.

The US dollar was mixed overall and slightly weaker on a trade-weighted basis, with safe-haven flows supporting the greenback against the euro but not against traditional safe-haven currencies such as the yen and Swiss franc.

The European Central Bank's policy decisions are becoming increasingly influenced by developments in France, particularly rising French government borrowing costs and concerns about the country's fiscal position. This has complicated the ECB's task of setting monetary policy for the entire Eurozone.

French bond yields have risen sharply relative to German bunds, reflecting investor concerns about France's public finances. As a result, the spread between French and German 10-year government bond yields has widened significantly, creating financial stress within the region. This is happening as the ECB tries to focus on its primary mandate of price stability.

For the ECB, the dilemma is: If it keeps policy tight to combat inflation, higher borrowing costs could further pressure France and other highly indebted countries in the region. If it eases policy to support growth and financial stability, it risks being seen as responding to fiscal problems rather than inflation dynamics.

The Euro tends to come under pressure when investors become concerned about fragmentation within the Eurozone, and wider French-German yield spreads can weigh on regional assets and encourage capital flows into perceived safe havens such as German bunds, the Swiss franc and, at times, Sterling.

In summary, French fiscal and bond-market stresses are no longer just a French issue. They have become a Eurozone issue that the European Central Bank cannot ignore, even when making decisions that are officially driven by inflation and economic growth.

Eurozone consumers grew slightly more pessimistic this month as the war in the Middle East continues to drive up energy costs.

The European Commission’s flash consumer-confidence indicator fell 1.1 points to -17.9 in October. This was lower than a consensus of economists polled last week, which expected a reading of minus 17.0.

“Consumer confidence fell further below its long-term average,” the commission said.

Sentiment among households has now fallen for two consecutive months in the Eurozone, with inflationary pressures keeping consumers on edge as continuing conflict in the Middle East continues to drive up energy prices.

The contest to succeed Christine Lagarde as ECB President is accelerating, with European policymakers keen to settle the issue before France's Presidential Election timetable complicates matters in 2027. Financial markets are also seeking clarity after months of speculation about Lagarde's future.

Two candidates have emerged as the leading contenders: Pablo Hernández de Cos, the former Spanish Central Bank Governor, is described as a policy "dove" and currently viewed as the favourite. Spain has never held the ECB presidency. Klaas Knot, a Dutch Central Bank Governor, is regarded as a moderate "hawk”. The first ECB President was a Dutchman, Wim Duisenberg. He was considered to be a ‘compromise’ candidate, since both Germany and France were unable to agree that their candidate should be appointed.

The eventual outcome may reflect a broader political bargain, with countries trading support for senior positions such as Chief Economist or other Executive Board roles.

The upcoming reshuffle could be unusually significant because three or four of the ECB Executive Board's six members may change within a short period, potentially making it the largest leadership turnover in the institution's history.

For investors, the key question is whether the post-Lagarde ECB will lean more hawkish or dovish: A Knot presidency would likely be interpreted as somewhat more inflation-focused and potentially more hawkish on rates. A de Cos presidency would likely be viewed as relatively more dovish and growth-sensitive.

However, any shift in policy bias will depend on the wider composition of the Executive Board, not just the President.

The single currency was generally under pressure on global FX markets yesterday, weighed down by concerns over French public finances, widening Eurozone bond spreads and a broader flight towards safe-haven assets.

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