In a direct message to financial markets, the Bank of England has urged them to brace for a potential “sharp repricing” of risk across the board. The Financial Policy Committee (FPC) warned that both tech valuations and US political stability are being mispriced, creating the conditions for a “sharp market correction.”
The FPC argues that the risk in the AI sector is being underestimated. The “stretched” valuations of firms like OpenAI ($500 billion) do not adequately reflect the current lack of profitability or the potential for supply chain bottlenecks.
Similarly, the risk associated with the US Federal Reserve’s independence is being downplayed. The committee warned that a “sudden or significant change in perceptions of Federal Reserve credibility” could lead to a chaotic repricing of all US dollar assets, from government bonds to equities.
The Bank’s report suggests that the current market calm is based on an underappreciation of these twin threats. A “sudden correction could occur” when the market is forced to price these risks more accurately.
The FPC concluded with a specific warning for the UK, stating that as a global financial centre, it is highly exposed to any global repricing event. The “risk of spillovers… is material” and could lead to a sudden tightening of financial conditions.