BIS Advocates AI for Central Banks

The Bank for International Settlements (BIS) has called on all central banks to embrace artificial intelligence (AI) to aid economic stability. The BIS said AI has the potential to reshape economic and financial systems.

In a pre-released chapter of its upcoming Annual Economic Report for 2024, the BIS highlighted how AI could impact inflation trends and financial stability.

The BIS Innovation Hub, led by Cecilia Skingsley, is actively testing AI's capabilities in collaboration with central banks.

Skingsley noted, "Central banks were early adopters of machine learning and are well positioned to make the most of AI's ability to impose structure on vast troves of unstructured data." Projects like Aurora and Raven exemplify this effort, focusing on detecting money laundering and enhancing cyber resilience.

AI's Benefits and Risks

The full BIS Annual Economic Report 2024, set to be published on June 30, delves into AI's implications for central banks and outlines the potential benefits and risks of new AI applications.

AI's advantages include improvements in lending and payments. However, the report adds that AI also brings risks, such as the potential for sophisticated cyberattacks. It also emphasizes the critical role of data in the AI revolution and calls for greater cooperation among central banks.

Hyun Song Shin, BIS's head of research and economic advisor, remarked on AI's direct impact on central bank operations.

He stated, "AI models directly affect how central banks do their jobs. Vast amounts of data could provide faster and richer information to detect patterns and latent risks in the economy and financial system."

This sentiment underscores the importance of AI in nowcasting or using real-time data to more accurately predict economic variables like inflation.

Enhancing Financial Stability

Another crucial aspect highlighted in the report is AI's potential to identify financial system vulnerabilities. This capability allows authorities to manage risks better. Data has become an increasingly valuable asset and will be the cornerstone of central banks' AI endeavors.

The report also explores how AI could impact labor markets, productivity, and economic growth. Firms might adjust prices more rapidly in response to macroeconomic changes, influencing inflation trends.

The BIS noted that the effects on demand and inflationary pressures would hinge on the pace at which displaced workers find new jobs and whether households and firms anticipate future AI-driven gains accurately.

AI is poised to improve efficiencies and reduce costs in payments, lending, insurance, and asset management in the financial sector. However, the BIS cautioned that AI introduces new risks, such as novel cyberattacks, and may amplify existing ones like herding, runs, and fire sales.

Looking Ahead

As the BIS continues to advocate for AI adoption, central banks worldwide are urged to integrate AI into their operations. The upcoming BIS Annual Economic Report 2024 will provide further insights into this critical transition.

The call to action is clear: embrace AI to enhance financial and price stability while remaining vigilant to the new risks it may introduce.