The Bank for International Settlements (BIS) has urged central banks to adopt artificial intelligence (AI) due to its expected major impact on the economy and financial system.

In a preview of its upcoming Annual Economic Report for 2024, the BIS highlighted that AI's widespread adoption could influence inflation trends and encouraged policymakers to integrate AI into their operations to boost financial and price stability.

Cecilia Skingsley, head of the BIS Innovation Hub, stated that the BIS is actively testing AI's capabilities in collaboration with central banks. She mentioned that central banks, being early adopters of machine learning, are well-suited to harness AI's potential to manage vast amounts of unstructured data. Projects like Aurora, which aims to detect money laundering through payment data, and Raven, which enhances cyber resilience using AI, are examples of these efforts.

The full BIS Annual Economic Report 2024 and the BIS Annual Report 2023/24 will be released on June 30.

In the Annual Economic Report 2024, the BIS discusses the implications of new AI applications for central banks, noting both potential benefits, such as improved lending and payments, and risks, like advanced cyberattacks. The report stresses the growing importance of data in the AI era and calls for increased cooperation among central banks.

Hyun Song Shin, BIS head of research and economic advisor, said that AI models are crucial for central banks' functions, as vast data can provide quicker, richer insights into economic patterns and risks. AI can improve nowcasting by using real-time data to predict inflation and other economic variables more accurately, though human judgment remains essential for final decisions. AI can also help identify financial system vulnerabilities, aiding risk management. Data will be key to central banks' use of AI technology.

The report also examines AI's broader effects on labor markets, productivity, and economic growth, suggesting that AI could help firms adjust prices faster in response to macroeconomic changes, impacting inflation trends. The effects on demand and inflationary pressures will depend on how quickly displaced workers find new jobs and whether households and firms correctly anticipate future AI-driven benefits.

In the financial sector, AI is expected to enhance efficiencies and reduce costs in payments, lending, insurance, and asset management. However, the BIS warned that AI brings new risks, such as sophisticated cyberattacks, and could amplify existing risks like herding, runs, and fire sales.