fbpx
Central Banks Urged to Leverage AI for Better Inflation Predictions, Says BIS Central Banks Urged to Leverage AI for Better Inflation Predictions, Says BIS
According to the Bank for International Settlements, Central banks should leverage the benefits of AI. That’s not all, it also emphasized... Central Banks Urged to Leverage AI for Better Inflation Predictions, Says BIS

According to the Bank for International Settlements, Central banks should leverage the benefits of AI. That’s not all, it also emphasized that AI should not replace humans in setting interest rates. This recommendation comes from BIS’s first major report on AI finding further integration promise in the banking sector.

The BIS, often regarded as the central bank for central banks, urged policymakers to harness AI’s immense power to monitor data in real-time, thereby enhancing their ability to predict inflation. This capability was found lacking in the wake of the COVID-19 pandemic and Russia’s invasion of Ukraine.

During that time, major central banks, including the U.S. Federal Reserve and the European Central Bank, failed to anticipate the global inflation surge. AI models, although promising, should not be solely relied upon due to their untested nature and potential to “hallucinate” or generate false outputs.

Cecilia Skingsley, a top BIS official and former Swedish central banker, stated, “We like to hold humans accountable,” emphasizing the importance of human judgment in setting interest rates. “So I can’t really see a future where an AI will be setting (interest) rates.

The BIS already has eight AI projects underway, aiming to utilize the technology for various financial and economic applications. Hyun Song Shin, the BIS’s head of research and top economic adviser, noted that policymakers should not view AI as “something magical.” Instead, he highlighted AI’s practical use in finding “needles in haystacks” and identifying vulnerabilities within financial systems.

AI’s integration is also expected to reshape labor markets, potentially boosting productivity and economic growth. Its widespread adoption could enable firms to adjust prices more swiftly in response to macroeconomic changes, influencing inflation dynamics.

With that said, the BIS cautioned about the risks associated with AI, including new forms of cyberattacks and the amplification of existing issues like herding, bank runs, and financial asset fire sales. “The call for action to central banks is to foster a community of practice,” Shin said. “To share experience, to share best practices, but also to share data and the models themselves.

The BIS’s report serves as a crucial reminder of the technology’s potential benefits and risks; especially in a period where policy makers across the globe are trying to walk the balance between regulation and innovation.

ODSC Team

ODSC Team

ODSC gathers the attendees, presenters, and companies that are shaping the present and future of data science and AI. ODSC hosts one of the largest gatherings of professional data scientists with major conferences in USA, Europe, and Asia.

1