Central banks should leverage artificial intelligence to enhance their analytical capabilities in achieving financial and price stability, as highlighted by the Bank for International Settlements (BIS).
According to a recent report, AI is poised to significantly impact the financial system, labor markets, productivity, and economic growth. However, the BIS cautions that widespread AI adoption could influence inflation dynamics.
“The rapid and widespread adoption of AI implies an urgent need for central banks to elevate their efforts,” the BIS states. “They must enhance their capabilities not only as informed observers of technological advancements but also as active users of this technology.”
By utilizing AI, central banks can improve nowcasting—making use of real-time data to better forecast inflation and other economic indicators, as well as identify vulnerabilities within the financial system, which enables authorities to manage risks more effectively.
Hyun Song Shin, the head of research and economic adviser at the BIS, notes, “The vast amounts of data available can provide faster and richer information to detect patterns and latent risks within the economy and financial system. This capability could greatly enhance central banks’ abilities to guide and predict economic trends.”
In the financial sector, the report suggests that AI can lead to greater efficiencies and reduced costs in areas such as payments, lending, insurance, and asset management. Nonetheless, the introduction of this technology also presents risks, including new types of cyber attacks and potential intensification of existing issues like herding, runs, and fire sales.
The report emphasizes that given the extensive impacts of AI, there is a critical need for central banks to collaborate in establishing a community of practice aimed at sharing knowledge, data, best practices, and tools related to this emerging field.
For further insights into the challenges and opportunities that AI presents to the banking sector, consider registering your interest in Finextra’s inaugural NextGenAI conference on November 26, 2024.