BIS: Central Banks Must Prepare For AI’s Impact On Financial System

The rapid adoption of Artificial Intelligence (AI) requires central banks to embrace the new technology, the Bank for International Settlements (BIS) has said. In a new report, the BIS urged policymakers to anticipate the transformative effects of AI on the economy and to use it to sharpen their own analytical tools in pursuit of financial and price stability.

According to a press release, “the special chapter of the BIS Annual Economic Report 2024 lays out the implications of new AI applications for central banks. AI is poised to impact the financial system, labour markets, productivity and economic growth. “With widespread adoption, it could enhance firms’ ability to adjust prices faster in response to macro-economic changes with repercussions for inflation dynamics. The job of central banks as stewards of the economy will also be directly affected as frontline users of AI tools.

“Central bank use cases for AI include enhancing nowcasting by using realtime data to better predict inflation and other economic variables and to sift through data for financial system vulnerabilities, allowing authorities to better manage risks. “Data have become an even more valuable resource with the advent of AI and will be the cornerstone of central banks’ use of the technology.” The statement further said:

“The effects on demand and therefore on inflationary pressures will depend on how quickly displaced workers can find new jobs, and whether households and firms correctly anticipate future gains from AI. In the short-run, supply could outstrip demand, which could lower pressures but those effects could reverse over time as demand also catches up through higher incomes. Central banks will need to stay attuned to these dynamics in their monetary policy.

June 28, 2024