Central Banks Must Prepare for Profound Impact of Artificial Intelligence, BIS Says
The BIS encourages central banks to embrace the benefits of AI while not relying on it to set interest rates. AI can help central banks analyse real-time data and forecast inflation more accurately. New AI models can reduce risks, but they should not be employed as robo-ratesetters.
In its first major research on AI, the BIS emphasised the need for policymakers to use AI to monitor real-time data and improve their capacity to predict inflation.
The paper highlighted inadequacies in inflation forecast amid major events such as the COVID-19 epidemic and Russia's invasion of Ukraine. The US Federal Reserve, the European Central Bank (ECB), and other major central banks underestimated the extent of the worldwide inflation increase. The BIS believes that emerging AI models can assist avoid such hazards in the future, but they should not be used as robo-ratesetters given to their untested nature and possibility of hallucinations.
Cecilia Skingsley, a top official at the BIS, emphasised the importance of human accountability in the decision-making process, particularly when it comes to setting interest rates. She stated, "So I can't really see a future where an AI will be setting (interest) rates." While the BIS acknowledges AI's enormous potential, it believes that human judgement is critical in such cases.
The BIS, also known as the central bankers' central bank, has previously participated in eight AI initiatives. Hyun Song Shin, the BIS's head of research and top economic adviser, emphasised that artificial intelligence may help discover risks in financial systems and uncover hidden patterns in massive amounts of data. However, he warned against considering AI as a magical answer and emphasised the significance of sharing best practices, experiences, and data among central banks.
The adoption of artificial intelligence is projected to have a considerable impact on labour markets, productivity, and GDP. With widespread use, businesses may be able to adjust pricing more swiftly in reaction to macroeconomic shifts, thus affecting inflation rates.
While AI has obvious advantages, the BIS has also identified the hazards connected with its usage. These include new sorts of cyber attacks as well as the escalation of pre-existing threats like herding, bank runs, and financial asset fire sales.
BIS urges central banks to embrace the benefits of AI but not rely on it for setting interest rates.
AI can help central banks monitor real-time data and improve inflation prediction.
New AI models can mitigate risks but should not be used as robo-ratesetters.
Source: REUTERS