The Bank for International Settlements (BIS) has emphasized the need for central banks to embrace artificial intelligence (AI) in order to stay ahead of the game as AI technology continues to impact the economy and financial system. In a pre-released chapter of its upcoming Annual Economic Report for 2024, the BIS highlighted the potential effects of widespread AI adoption on inflation trends and stressed the importance of incorporating AI into central bank operations to enhance financial and price stability. The BIS Innovation Hub is actively testing AI capabilities in collaboration with central bank partners through projects like Project Aurora and Project Raven, which focus on detecting money laundering and enhancing cyber resilience using AI.
The full BIS Annual Economic Report 2024 will be published on June 30, shedding more light on the implications of new AI applications for central banks. The report will discuss the benefits of AI, such as improvements in lending and payments, as well as the risks associated with sophisticated cyberattacks. It will also emphasize the central role of data in the AI revolution and the need for greater cooperation among central banks to leverage AI effectively.
Hyun Song Shin, head of research and economic advisor at BIS, highlighted that AI models have a direct impact on how central banks carry out their functions. By utilizing vast amounts of data, central banks can detect patterns and latent risks in the economy and financial system more efficiently. AI can also aid in nowcasting, allowing for better predictions of economic variables like inflation, although final decisions must still be made by humans. As data becomes increasingly valuable, it will serve as the foundation for central banks’ use of AI technology and risk management.
The BIS report also delves into the broader economic implications of AI, including its impact on labor markets, productivity, and economic growth. AI’s ability to help firms adjust prices quickly in response to macroeconomic changes could influence inflation trends, while the effects on demand and inflationary pressures will depend on how well displaced workers find new jobs and whether households and firms anticipate future gains from AI technology. In the financial sector, AI is expected to enhance efficiencies and lower costs in various areas like payments, lending, insurance, and asset management, though it also introduces new risks like novel cyberattacks and exacerbates existing ones such as herding, runs, and fire sales.
In conclusion, the BIS has recognized the transformative potential of AI in shaping central banking operations and the broader economy, calling for central banks to proactively incorporate AI into their strategies. With AI technology evolving rapidly, central banks need to adapt and leverage AI’s capabilities to enhance financial stability and economic growth. By understanding the challenges and opportunities presented by AI, central banks can navigate the changing landscape of the financial system and ensure they are well-equipped to address emerging risks and opportunities in the digital age.
