181 The Bank for International Settlements (BIS) has highlighted the potential benefits of artificial intelligence (AI) for central banks but emphasized that AI should not replace humans in setting interest rates. In its first comprehensive report on AI, the BIS underscored the technology’s ability to enhance real-time data monitoring and improve inflation prediction, which was notably deficient following the COVID-19 pandemic and Russia’s invasion of Ukraine. The report notes that AI could help central banks better predict inflation by leveraging advanced data analysis techniques. However, it warns against fully automating critical decisions like interest rate setting due to the untested nature of AI models and their potential to “hallucinate” or produce unreliable outputs. Cecilia Skingsley, a senior official at BIS and former Swedish central banker, stressed the importance of human accountability in interest rate decisions, given their significant impact on society. Despite AI’s promise in improving data analysis and spotting financial system vulnerabilities, the BIS urged caution. The technology should be seen as a tool rather than a magical solution, as stated by Hyun Song Shin, BIS’s head of research and chief economic adviser. The BIS currently runs eight AI-related projects and advocates for a collaborative approach among central banks to share experiences, best practices, data, and models. AI’s adoption could also transform labor markets, productivity, and economic growth, enabling firms to adjust prices more rapidly in response to macroeconomic changes, potentially affecting inflation. However, the BIS also warned of the risks associated with AI, including new types of cyber attacks and the amplification of existing financial risks like herding behavior, bank runs, and asset fire sales. The BIS calls for central banks to foster a community of practice to collectively advance their understanding and application of AI while mitigating associated risks. This collaborative effort aims to ensure the safe and effective integration of AI into central banking functions. You Might Be Interested In First American Executive Tanya Ceperley Honored as 2024 HousingWire Finance Leader Nine Bangladesh Banks in ‘Red Zone’ as Financial Health Deteriorates CBE’s Measures to Correct Egypt’s Economic Path: Finance Minister AECOM-Stantec Joint Venture Secures Environmental Planning Contract with U.S. Navy Northwestern Mutual Study Reveals 95% of Parents Saving for Kids’ College Expect to Cover Majority of Costs Egypt Secures IMF Deal Following Pound’s Plunge and Rate Hike