Central Bank Policymaking Gets Tougher! Does the AI Boom Push Up Neutral Rates? Bond Investment Giant PIMCO Offers an Alternative View

Markets generally expect that AI will drive economic growth by boosting productivity, thereby pushing up the neutral rate (neutral rate), leading many central bank officials to incorporate this factor into their monetary policy assessments. However, PIMCO, a bond investment-focused asset management firm, argues that actual financial market performance does not support this consensus. Analyzing market reactions following major AI-related announcements, PIMCO finds that real yields, nominal yields, and investor expectations for long-term interest rates have mostly trended downward, suggesting that AI may not necessarily raise the neutral rate—and could even provide support for bond markets in the medium term.

In theory, if AI consistently enhances productivity and raises long-term economic growth rates, household future income would increase, reducing the need for savings and thereby pushing up the real neutral rate. Thus, markets generally view AI as a factor inclined to raise interest rates.

However, PIMCO’s analysis of financial market performance following major AI-related news events shows that reality differs. Further examining changes in forward rates since the rollout of large-scale AI models in 2023, investor expectations for future neutral rates have generally been revised downward, not upward. PIMCO acknowledges that event study methodology has limitations but concludes that, currently, markets lack consistent evidence proving that AI development has begun to push up interest rates.

To explain the gap between market behavior and theory, PIMCO offers an alternative interpretation. The research points out that while AI boosts productivity, it also brings uncertainty associated with economic transformation. Although AI may enhance long-term economic potential growth, during the transition period, employment stability and labor income may face greater volatility, and public anxiety about job displacement may rise.

Under these circumstances, households may not reduce savings; instead, they may increase precautionary savings in response to future risks, further boosting demand for safe-haven assets like government bonds, thereby exerting downward pressure on the neutral rate. In other words, even if AI ultimately helps boost economic growth, its short- to medium-term market impact may resemble a risk shock rather than a simple growth tailwind.

PIMCO also notes a clear difference between the current AI wave and the 1990s tech revolution. The widespread adoption of information technology at that time significantly improved overall labor productivity and drove broad-based wage and income growth. However, current market valuations suggest that the economic benefits created by AI may be concentrated among a few firms and capital holders, rather than widely distributed across the broader labor market.

If income distribution continues to concentrate, coupled with the uncertainty brought by AI transformation, households may become more inclined to increase savings and reduce consumption—contrary to the traditional theoretical expectation of reduced savings—making AI’s impact on interest rates more complex.

PIMCO believes that while market reactions may change as AI applications deepen in the future, at least for now, AI may not only enhance long-term economic growth potential but also exert downward pressure on the real neutral rate by increasing demand for safe-haven assets and compressing term premiums. Overall, AI’s impact may go beyond boosting potential growth, potentially altering savings, investment, and capital allocation behaviors, making it more challenging for central banks to assess the neutral rate in future monetary policy decisions. For bond markets, AI does not necessarily imply persistently higher interest rates; instead, it could continue to provide support in the medium term.