BIS: Central banks should harness AI, keep human oversight on interest rates

Central banks should leverage the benefits of artificial intelligence (AI) while ensuring humans retain control over setting interest rates, according to the Bank for International Settlements (BIS). In its first comprehensive report on AI, the central banking umbrella group emphasized the need for policymakers to utilize AI’s power to monitor data in real-time, enhancing their ability to predict inflation. This ability was notably deficient following COVID-19 and Russia’s invasion of Ukraine, when major central banks, including the U.S. Federal Reserve and ECB, underestimated the global inflation surge.

New AI models can mitigate such risks, but their untested nature and potential for “hallucinations” mean they should not replace human decision-makers, said Cecilia Skingsley, a BIS official and former Swedish central banker. “We like to hold humans accountable,” Skingsley noted, highlighting the importance of human judgment in setting borrowing costs.

The BIS, known as the central bankers’ central bank, is already involved in eight AI-related projects. Hyun Song Shin, the BIS’s head of research, cautioned against viewing AI as “something magical,” but acknowledged its potential to identify vulnerabilities in financial systems and significantly impact labor markets, productivity, and economic growth. AI could enable firms to adjust prices more swiftly in response to macro-economic changes, affecting inflation dynamics.

However, the BIS also warned of the risks AI introduces, such as new cyber threats and the amplification of existing issues like herding, bank runs, and financial asset fire sales. Shin called for central banks to foster a collaborative environment to share experiences, best practices, data, and models, ensuring the responsible and effective use of AI.

Photo credit: Bank for International Settlements