8 June 2026: BOE’s Bailey warns of possible AI rationing on limited capacity

Britain's economy is expected to show signs of the impact of the war in Iran when official figures for April are released this week, with forecasts of a sharp pullback after a surprisingly strong start to the year. The figures due this Friday from the Office for National Statistics are set to show the beginnings of a squeeze on households after the conflict sent fuel prices surging.

Figures for April have already revealed that retail sales fell at their fastest rate in almost a year, down 1.3%, as soaring petrol and diesel prices hit fuel sales and demand for clothing waned. Fuel sales plunged by 10. 2% in April, the largest fall since November 2020. This is set to drag on the dominant service sector's performance in April and leave overall gross domestic product well below the 0. 3% growth recorded in March.

March's GDP data helped drive overall growth of 0.6% in the first quarter, which was far better than expected, but the strong growth has faded throughout the second quarter, according to experts.

Deutsche Bank’s chief UK economist, Sanjay Raja, said: “After a super strong start to the year, we expect some correction in the second quarter. Indeed, with the energy shock from the Iran conflict in full swing, household incomes will likely be squeezed.

“The cost of living and the cost of doing business will have increased, weighing on activity and investment.”

He said he is not expecting a “big drop- off in momentum just yet”,, but is expecting GDP to edge down by around 0.1% MoM in April as the effects take hold.

Raja added: “We continue to think activity will remain subdued as the energy shock catches up with households and businesses, while political uncertainty likely ramps up over the summer, starting with next week’s by-election.

Bank of England Governor Andrew Bailey has suggested that artificial intelligence may need to be rationed due to a lack of energy capacity, which will constrain every economic sector's ability to deploy the new technology.

Bailey said on Friday that companies and governments face “very big social choices” as they could be forced to decide between priorities, such as revolutionising health care or making breakthroughs in defence technology.

“AI is probably going to fairly soon be at a point where it can do more things, more big things than we have the power supply to achieve,” Bailey said at an event with former Cabinet minister Ed Balls in Kirkcaldy.

“Do we want to make more very big breakthroughs in health?” Or “do we want to make more breakthroughs in drone technology to fight the Russians in Ukraine,” he asked in one possible trade-off.

The caution comes amid concern that the mass roll-out of energy-hungry data centres, critical to advances in AI, is straining power supplies worldwide. Data centres require massive and constant power flows, and experts say this could lead to much higher overall energy demand.

Bailey said the issue of potential trade-offs was recently raised with him by the head of a large AI firm.

The Central Bank chief has argued that the UK economy’s slow growth can be attributed to it being stuck between waves of technological innovation. The last one was the IT boom and the Internet. While he sees artificial intelligence as the most likely candidate to be the next general-purpose technology, he has cautioned that it will take time for the productivity benefits to feed through.

Chancellor of the Exchequer Rachel Reeves has conspicuously disappeared from public view as Prime Minister Keir Starmer battles a severe internal crisis triggered by a deeply unpopular budget and Labour’s crushing defeats in England, Wales and Scotland in the recent local elections.

Her sudden withdrawal, highlighted by a glaring absence at the Confederation of British Industry's flagship dinner, suggests a calculated political distancing from a sinking premiership.

The instability at the pinnacle of British government threatens to derail economic recovery efforts and spook international bond markets. For global observers, the apparent fracture between Number 10 and Number 11 Downing Street signals a government entering its terminal phase.

Sterling weakened modestly overall last week, driven mainly by a stronger U.S. dollar after a hotter‑than‑expected U.S. jobs report boosted expectations of further Federal Reserve tightening. Against most other major currencies, however, the pound held a slightly firmer tone. It closed at 1.3342, having fallen to a low of 1.3330.

History is being made on Wall Street at a breathtaking pace in recent weeks. In addition to watching the ageless Dow Jones Industrial Average, the benchmark S&P 500, and the technology-driven Nasdaq Composite all soar to record highs, investors witnessed a rare shift at the Federal Reserve.

May 15 marked the final day of Jerome Powell's second term as Fed chair. Given the highly public feud between President Donald Trump and Powell over interest rates, it became clear some time ago that a third term wasn't in the cards for the now-former Fed chair.

Although the Federal Reserve is an independent entity operating within the U.S. government, free to adjust monetary policy as FOMC members see fit, this hasn't stopped Donald Trump from interjecting his view on what policymakers should do with interest rates.

Powell's final year as Fed chair was marked by repeated calls from Trump for aggressive interest rate cuts to 1% or lower. For context, the FOMC lowered the Federal Funds target rate six times between September 2024 and December 2025. However, the current federal funds target rate of 3.5% to 3.75% is well above the president's desired target.

There are likely several catalysts behind Trump's calls for lower interest rates. Reducing lending rates should spur corporate hiring and innovation spending. Lower borrowing costs could reverse a modest uptrend in the unemployment rate over the last three years, although job creation has been significant so far this quarter.

A sharp reduction in interest rates should also lead to lower Treasury bond yields. The 10-year T-bond indirectly influences mortgage rates. Lower mortgage rates would make housing more affordable.

Lastly, slashing interest rates would make it significantly easier for the U.S. to service more than $39 trillion in outstanding debt. Persistent federal government deficits are raising red flags, and lower interest rates would make it easier for the U.S. government to make its interest payments.

The US added 172,000 seasonally adjusted jobs last month, well above expectations of around 80,000 from a Dow Jones survey. It’s a good sign that the labour market has been steadily emerging from an earlier slump, despite ongoing concerns about inflation, oil prices, and the impact of AI.

Friday’s jobs report also positively revised the figures for March (up by 29,000 to 214,000) and April (up by 64,000 to 179,000), raising the three-month average to 188,000 jobs gained, a two-year high.

The FIFA World Cup, which starts later this week, was the main driver of job creation. Leisure and hospitality added 70k jobs, with the tournament taking place in 11 US cities starting next week, fuelling hiring in bars, restaurants, and hotels.

The local government sector also gained 55,000 jobs, mostly reflecting hiring for security and entertainment roles, and for more people to check $100 tickets on train rides to stadiums, according to one economist speaking to reporters.

May's positive jobs report could increase the likelihood of a Federal Reserve interest rate hike this year, according to market observers.

CME's FedWatch increased the likelihood of a rate hike by the end of December to almost 70%, up from 52% before the latest figures.

The market still expects rates to remain steady in the 3.50%-3.75% range after next week's June meeting.

The dollar index rallied to a high of 100.11 and closed at 100.07 in the wake of the employment data, which showed that the economy is so far avoiding the spectre of stagflation that has lingered since the beginning of the conflict in Iran.

Eurozone growth momentum has essentially stalled. Quarterly GDP has hovered around 0.0–0.1%, and several member states, notably Germany, Italy, and the Netherlands, have already flirted with contraction. The bloc isn’t in recession yet, but it’s running out of buffer.

The manufacturing PMI has been stuck below 50 for over a year, signalling persistent shrinkage. Germany’s industrial sector, historically the Eurozone’s engine, remains the biggest drag. Services PMIs, which had been the only thing keeping the economy afloat, have slipped towards the 50 threshold, indicating that domestic demand is softening as well.

The retail sector is being squeezed, leading to lower retail sales. Real incomes are still recovering from the inflation shock, while savings buffers built during the pandemic have thinned. Retail sales have been flat to negative across most of the bloc. Households simply aren’t spending enough to offset weak external demand.

ECB policy is still restrictive, and with this week’s meeting of the Central Banks’ Governing Council leaning heavily towards a rate hike, whether it is described as pre-emptive is debatable, given the rise in inflation caused by the war in Iran, which could reignite following Iranian actions overnight.

Higher borrowing costs will weigh on business investment, housing markets, and credit growth.

This is exactly the kind of environment where recessions tend to form.

On June 3, the Financial Times reported that ECB Governing Council member Isabel Schnabel stated that a peace agreement between the US and Iran, reached before next week's ECB meeting, would not weaken the rationale for raising interest rates.

She noted, 'If a peace agreement is indeed reached on the eve of the meeting, it will be part of the discussion. But we cannot know if it is lasting or credible.' She hinted at supporting a 25-basis-point rate hike by the ECB.

She believes that if the conflict remains unresolved, discussions among policymakers before setting rates on June 11 will be quite straightforward.' If a peace agreement is reached, the discussions might be slightly less straightforward. But the justification for a rate hike may still exist, just not as robustly.' She stated, 'At some point, we cannot let the market bear everything. We need to take a stance.'

The increase in hostilities between Israel and Hezbollah, which was the cause of an Iranian missile attack on Israel overnight, appears to have set any consideration of a peace deal back to stage one, despite Trump’s criticism of Israel’s actions.

The euro weakened overall last week, driven mainly by broad U.S. dollar strength, while showing modest gains against several other G10 currencies. The single currency fell to a low of 1.1518 and closed at 1.1522.

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