The AI boom could change where interest rates end up, a top central banker says

The artificial intelligence boom may be changing more than just stock prices.

AI could alter where interest rates ultimately settle by boosting demand, lifting productivity, and increasing capital investment, Bank of Japan Deputy Governor Shinichi Uchida said Monday.

“First, it is a big positive demand shock, which has put upward pressure on the economy and prices. Second, it could affect the supply side, perhaps positively by raising productivity and enhancing capital stock accumulations,” Uchida said in a speech in Tokyo.

He added that the developments could affect r-star, or the neutral rate of interest, which is the level that neither stimulates nor restrains the economy.

If AI raises that underlying rate, it could mean central banks ultimately need to keep policy rates higher than investors previously expected to keep inflation in check without unnecessarily slowing economic activity.

AI has been a “favorite topic” among central bankers in recent years, Uchida said, but what was once largely a conceptual discussion about the future has become an immediate issue for monetary policy.

His remarks come as investors debate whether the recent surge in long-term bond yields reflects a temporary repricing or a more lasting shift in the level where interest rates eventually settle. Uchida suggested AI may be another reason investors and policymakers need to rethink that destination.

That question carries particular weight in Japan, which spent much of the past three decades battling deflation and ultra-low interest rates before the BOJ began tightening policy.

On Monday, the benchmark 10-year JGB yield stood at 3.09% around midday in Japan, hovering near a three-decade high. The 30-year yield touched a record 4.235%.

If the neutral rate is rising, higher borrowing costs may not just be part of the BOJ’s exit from ultra-loose policy — they may be here to stay.

Uchida’s speech adds to a growing debate over how AI could reshape global capital flows.

Rising Japanese government bond yields are narrowing the yield advantage that encouraged domestic investors to buy overseas bonds for years, potentially reducing demand for US Treasurys.

Last week, strategists at ING said AI could account for roughly one-fifth of the recent rise in long-term bond yields, citing heavy borrowing to finance data centers and other infrastructure, as well as expectations that the technology will lift productivity and long-run economic growth.