By Marta Vilar – MADRID (Econostream) – European Central Bank Chief Economist Philip Lane said on Friday that expectations of future productivity gains from artificial intelligence were pushing up long-term interest rates, tightening financing conditions in Europe and potentially holding back investment.

Speaking at the Financial Times' Economics Show, Lane said financial markets were increasingly pricing the possibility of stronger AI-driven productivity growth in the early 2030s, contributing to an increase in long-term real interest rates.

"Markets are pricing a sharper increase in real rates over, let's say, the early 2030s," he said.

The increase was consistent with expectations that AI-related productivity gains could become more visible around that time, potentially resulting in structurally higher real interest rates, he said.

However, while the US was benefiting from a substantial AI investment boom, Europe was experiencing the resulting increase in borrowing costs without a comparable expansion in domestic investment.

"From our point of view, we have the higher rates. We don't have the current scale of the investment boom the US has," Lane said. "And so on net, that can be viewed as a tightening of conditions in Europe, which will slow down investment across all sectors."

The tightening could also affect European firms seeking to invest in AI themselves, he said, while large US technology companies with strong balance sheets remained able to borrow despite higher financing costs.

"Globally, higher rates now, in the context of the global AI boom, also in the context of many governments also continuing to want to borrow a lot of money, is leading to this upward increase in rates," he said.

Lane nevertheless emphasized that AI was already providing significant support to euro area economic activity, particularly through investment and credit growth.

He estimated that lending to firms was growing by around 4%, compared with approximately 3% in the absence of AI-related activity, suggesting that the technology accounted for roughly a quarter of current credit growth.

"Without AI, you wouldn't see credit dynamics being at the level where they are," he said.

Lane also pointed to stronger-than-expected European exports of AI-related equipment and said firms were maintaining investment plans that might otherwise have been scaled back.

However, he argued that Europe needed to develop its equity financing capacity to support innovative companies, rather than relying predominantly on bank lending.

"I would prefer to have seen a world where the other type of finance, risk-absorbing finance like equity, would make a stronger contribution," he said.