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Central banks need to embrace artificial intelligence (AI) to enhance their analytical tools for maintaining financial and price stability, according to a new report by the Bank for International Settlements (BIS).
The BIS highlights that AI will have a transformative impact on the financial system, labor markets, productivity, and economic growth. However, it cautions that widespread adoption could influence inflation dynamics.
“The rapid and widespread adoption of AI implies that there is an urgent need for central banks to raise their game,” says the BIS. “Central banks need to upgrade their capabilities both as informed observers of technological advancements and as users of the technology itself.”
As users of AI technology, central banks can improve nowcasting by utilizing real-time data to better predict inflation and other economic variables. AI can also help identify vulnerabilities within the financial system, enabling authorities to manage risks more effectively.
Hyun Song Shin, head of research and economic adviser at the BIS, states: “Vast amounts of data could provide us with faster and richer information to detect patterns and latent risks in the economy and financial system. All this could help central banks predict and steer the economy better.”
In the financial sector, AI can enhance efficiencies and reduce costs in areas such as payments, lending, insurance, and asset management. However, the technology also introduces risks, such as new types of cyber attacks, and may amplify existing risks, like herding, runs, and fire sales.
The report concludes that the significant impact of AI necessitates urgent collaboration among central banks to foster a community of practice. This community should focus on sharing knowledge, data, best practices, and tools related to AI.
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