AI Race Could Drive Up Interest Rates, Impacting Mortgages

The global race to develop and implement artificial intelligence is creating significant economic pressures that could lead to higher interest rates, potentially affecting mortgage payments for households. While AI was initially discussed in terms of job displacement and cost savings for companies, a new perspective suggests it could fuel inflation and necessitate higher interest rates. Shinichi Uchida, Deputy Governor of the Bank of Japan, described the current AI boom as a "major positive demand shock" that increases economic activity and prices. He also noted that technology companies are issuing large amounts of bonds to finance massive AI investments, which in turn drives up long-term interest rates.

The development of AI requires substantial physical infrastructure, including vast data centers, enormous quantities of chips, expanded power grids, energy facilities, communication networks, and a large workforce. This surge in investment is already visible in economic data. In the first quarter of 2026, U.S. business investment grew at an 11% annual rate, largely driven by AI infrastructure. European Central Bank President Christine Lagarde indicated that companies are expected to allocate about 10% of their total investments to AI this year, with credit inflation in the sector accounting for a quarter of business credit growth.

The intense competition for resources like chips, labor, and electricity is driving up their prices. This demand is not limited to AI components but extends to semiconductor manufacturing equipment, copper, and even power generation facilities, eventually impacting consumer electronics. Paradoxically, while AI is expected to boost productivity and lower costs in the long run, the immediate massive investments required are creating inflationary pressures. The Bank for International Settlements (BIS) warns that if investment and demand significantly outpace productivity gains, the initial effect will be inflationary, as the costs of building future efficient systems are incurred today.

Central banks typically raise interest rates to curb excessive demand and inflationary pressures. The substantial investments in AI are becoming a significant factor in monetary policy considerations. Furthermore, the need for financing is crucial. As AI-related expenses escalate, companies are increasingly relying on debt and credit, moving away from their accumulated cash reserves. The BIS has cautioned that these investment levels necessitate a shift towards debt financing. When major tech companies issue bonds in large volumes, they compete with governments and other corporations for investor capital, pushing bond yields higher. This rise in long-term interest rates, as noted by the Bank of Japan's deputy governor, is already occurring.

While the connection might seem indirect, these global financial trends can affect local mortgage rates. In Israel, for instance, the prime lending rate is tied to the Bank of Israel's interest rate, and other variable-rate mortgages are influenced by government bond yields. Even fixed-rate mortgages are indirectly affected by banks' financing costs and market yields. Global market conditions are interconnected, and the Bank of Israel has acknowledged that domestic bond yields are rising in line with global trends, with global inflation and energy prices being closely monitored. Although other factors like wars, government budgets, and the local labor market are currently more significant for short-term interest rates in Israel, the AI boom is becoming an additional consideration that could prevent interest rates from falling rapidly.

However, the outcome is not predetermined. If AI successfully boosts productivity significantly, costs could decrease, and inflationary pressures might ease. The BIS and the European Central Bank emphasize that the final result will depend on the balance between short-term investment and demand versus long-term productivity and supply. There is also a risk of an "AI bubble," where inflated stock values and debt do not align with actual AI-driven revenues. A market correction could occur, potentially lowering interest rates due to reduced demand and investment, but this would stem from market crashes and economic slowdowns. Regardless of the specific outcome, the perception of the AI race is shifting from a technological competition to a broad macroeconomic event, with global developments in data centers, bond issuance, and chip shortages having a tangible impact on financial markets and potentially on household expenses like mortgages.