The Central Bank vs. The Chip: Why the BoE is Right to Worry About Debt, But Wrong About the Outcome

**By Gemma Knight** | Urgent Market Response (2 December 2025)

The Bank of England's Warning: The Systemic Threat

The Bank of England's Financial Stability Report has rightfully injected urgency into the tech debate. This is not a warning about stock valuations; it is a warning about **systemic credit risk**. The BoE estimates that the $\mathbf{\$5}$ trillion projected spending on AI infrastructure is roughly half funded by debt ($\mathbf{\$2.5}$ trillion).

"Deeper links between AI firms and credit markets... mean that, should an asset price correction occur, losses on lending could increase financial stability risks." - **Bank of England**

1. The Difference Between Bad Debt and Necessary CapEx

The BoE's mechanism for panic is sound: high debt + asset correction = financial stability risk. **They are correct to identify the debt volume.** However, they risk applying a 1990s bubble framework to a 2020s structural build-out.

In the 2008 Financial Crisis, debt funded speculative, non-productive housing assets. In the 1990s, debt funded companies with **zero revenue and zero intrinsic utility.**

The $\mathbf{\$2.5}$ trillion debt cited by the BoE is primarily funding **chips, power infrastructure, and data centers**. This is **Capital Expenditure (CapEx)** for an essential utility that serves the entire global economy. This is structurally higher quality debt than speculative lending because the underlying assets are non-negotiable for future corporate survival.

2. Why the Outcome is Different: The Efficiency Moat

This is where our thesis of **The Efficiency Trade** diverges from the central bank's caution. The technology being funded by this debt is the only mechanism available for large corporations globally to achieve necessary **cost elimination and margin leverage.**

The global need for computational efficiency is a **mathematical necessity**, not a speculative choice.
If the debt-funded infrastructure were to fail, the global cost to the economy would be far greater than the debt itself, ensuring governments and enterprises will step in to protect this infrastructure.

Therefore, the risk of systemic default on this debt is lower than on speculative assets. The market for AI infrastructure is **non-cyclical and indispensable.**

3. The GBP Consequence: A Contradiction in Policy

The BoE report, combined with the Chancellor's budget, exposes a damaging policy contradiction at the heart of the UK economy:

BoE: Warning savers that the UK equity valuations are "most stretched since 2008" and citing $\mathbf{\$2.5}$T in debt risk.
Chancellor Reeves: Used the budget to encourage savers to **pile cash into those same stocks and shares** by reducing cash ISA limits.

This institutional cognitive dissonance undermines confidence. While the BoE's warning is global, the confusion over risk signaling is a specific, subtle headwind for **Sterling (GBP)**, which is already under pressure from domestic refinancing risks (3.9 million people refinancing mortgages at higher rates). The BoE's anxiety creates a persistent doubt over the UK's financial stability management.