Central banks worldwide are being urged to prepare for the profound impact of artificial intelligence (AI) on their operations, according to a recent report by the Bank for International Settlements (BIS).
The report highlights the potential benefits and risks of AI, emphasising the need for human oversight in critical decision-making processes.
Key Takeaways
- Central banks should harness AI to improve real-time data monitoring and inflation prediction.
- AI should not replace human judgement in setting interest rates.
- AI can help identify vulnerabilities in financial systems but also introduces new risks.
- Policymakers are encouraged to share best practices and data to foster a community of practice.
Embracing AI for Better Data Monitoring
The BIS report underscores the importance of AI in enhancing the ability of central banks to monitor data in real time. This capability is crucial for improving inflation predictions, a task that proved challenging during the COVID-19 pandemic and geopolitical events like Russia's invasion of Ukraine. The report suggests that new AI models could mitigate the risk of future inflationary surprises.
Human Oversight Remains Crucial
Despite the potential of AI, the BIS stresses that the technology should not replace human judgement, especially in setting interest rates. Cecilia Skingsley, a top BIS official, emphasised the importance of holding humans accountable for such critical decisions. "We like to hold humans accountable," she said, highlighting the societal impact of borrowing costs and the need for human judgement.
AI's Role in Financial Stability
AI's ability to analyse vast amounts of data can help central banks identify vulnerabilities in financial systems. Hyun Song Shin, the BIS's head of research, noted that AI should not be viewed as "something magical" but acknowledged its potential to find "needles in haystacks." However, the report also cautions that AI introduces new risks, such as cyber attacks and the amplification of existing risks like herding and bank runs.
The Call for a Community of Practice
The BIS encourages central banks to foster a community of practice to share experiences, best practices, and data. This collaborative approach aims to maximise the benefits of AI while mitigating its risks. "The call for action to central banks is to foster a community of practice," said Shin. "To share experience, to share best practice, but also to share data and the models themselves."
Impact on Labour Markets and Economic Growth
The widespread adoption of AI is expected to reshape labour markets, affecting productivity and economic growth. Firms may adjust prices more quickly in response to macro-economic changes, which could have significant implications for inflation. The BIS report highlights the need for central banks to be prepared for these transformative changes.
Conclusion
As AI continues to evolve, its impact on central banking will be profound. While the technology offers numerous benefits, it also introduces new risks that require careful management. Central banks are urged to embrace AI's potential while ensuring that human judgement remains at the core of critical decision-making processes.
Sources
- AI impact central banks: Central banks must prepare for profound impact of AI, BIS says - The Economic Times, The Economic Times.
