AI boom complicates monetary policy as central banks struggle to read blurred economic signals

AI boom raises risks of monetary policy mistakes, warn BIS economists

The AI boom is blurring the economic signals central banks rely on to set monetary policy, raising the risk they will make damaging mistakes, economists at the Bank for International Settlements have warned. Staff at the Basel-based organisation, which advises the world's central banks, said AI's effect on investment, trade and asset prices was powerful enough "to shape the global outlook in real time", supporting growth in the face of trade tensions and geopolitical shocks. These effects were now "large and observable" and could add to price pressures, they said, noting that spending on data centres and IT manufacturing facilities in the US had risen to 0.8 per cent of GDP, while the wealth effect of equity price gains was boosting consumers. AI could also have disinflationary effects, however, if it improved productivity -- or if worries about AI-related job losses curbed spending and reduced workers' bargaining power. Assessing the extent and timing of these effects was a challenge for central banks, the BIS economists warned, because strong GDP growth could simply reflect the temporary investment boom and wealth effects, while more lasting productivity gains were "uncertain and hard to measure". "The relative strength and timing of these forces remain uncertain," they said in an analysis published in BIS's latest monthly bulletin on Tuesday, adding that "near-term inflationary effects may already be emerging" while "disinflationary effects are likely to emerge more gradually". Greater uncertainty increases the danger of monetary policy "miscalibration", the BIS staff said, arguing that if central banks overestimated productivity gains or underestimated the rise in underlying demand, they risked leaving interest rates too low to contain inflation. Their intervention came as the US Federal Reserve began a two-day meeting to set policy against a backdrop of growing concern about the extent to which the AI boom is stoking price pressures in the American economy. Fed chair Kevin Warsh has argued that the US is on the cusp of an AI-induced productivity renaissance that will give the Fed room to cut borrowing costs without fuelling inflation. But some US rate-setters warn that in the near term, investment in data centres and demand for AI-associated products are leading to higher prices. With inflation running at more than double the Fed's target on its preferred PCE measure, Warsh is under growing pressure to show the central bank is serious about restoring price stability. Other central banks are also grappling with the uncertainties of AI. Philip Lane, chief economist at the European Central Bank, said earlier this month that its effects would depend on whether the technology displaced workers or helped them produce more and on whether energy supply could keep up with rising demand for power. He also cited other uncertainties, including whether AI activity would remain concentrated in the US and China and the speed of adoption. Assessing AI's overall impact on inflation would be "a major challenge" for central banks in the years ahead, Lane said.

BIS says AI boom risks clouding central banks' inflation signals

LONDON, July 28 (Reuters) - The artificial intelligence boom could make it significantly harder for central banks to judge the state of the economy and set interest rates, as the technology simultaneously boosts both demand and supply, the Bank for International Settlements said on Tuesday. In a bulletin on the economic implications of AI, the central bank umbrella group said policymakers face an unusually difficult task as AI generates powerful investment, trade and financial-market effects long before any broad-based productivity gains are fully visible. The current surge in AI spending, increasingly financed by debt, is already driving up ⁠economic activity and trade and fuelling gains in equity markets -- all of which can add to near-term inflationary pressures. At the same time, AI could eventually increase productivity and capacity, expanding supply and helping contain inflation. The challenge for policymakers is that the size, timing and distribution of those gains remain highly uncertain. "By simultaneously affecting demand and supply, AI blurs cyclical signals," the BIS said, warning that this could complicate central banks' assessment of underlying economic conditions and the calibration of monetary policy. One immediate risk is misreading strong growth driven by AI investment. ⁠Robust spending on data centres, chips and digital infrastructure may resemble an overheating economy, even if part of the expansion reflects longer-term increases in productive potential. Conversely, productivity gains could mask underlying demand pressures, making inflation trends harder to interpret. The BIS also highlighted the uneven impact of AI across countries and ⁠for labour markets. Economies that are major suppliers of semiconductors, computing infrastructure or AI-related services may enjoy stronger growth, while others could lag behind. Such divergence may lead to differing inflation and growth trajectories, increasing ⁠the complexity of monetary policy across jurisdictions. Financial-market effects present another challenge. AI-related optimism has driven rapid equity market gains, creating wealth effects that can support consumption and demand, but ⁠also raised the risk of asset price bubbles. The BIS stopped short of making policy recommendations but said central banks would need to disentangle temporary investment booms from lasting productivity improvements to avoid the risk of "policy miscalibration". Reporting by Marc Jones; Editing by Andrea Ricci Our Standards: The Thomson Reuters Trust Principles., opens new tab * Suggested Topics: * Artificial Intelligence Marc Jones Thomson Reuters Marc Jones is a senior global markets correspondent based in London with a focus on economics, central banks, policymakers, and crises. Previously he worked in Frankfurt covering the European Central Bank at the height of the euro zone turmoil, the UK companies desk during the initial phase of global financial crash. He started his Reuters career on the sports desk covering everything from soccer to cycling.

Why AI makes central banking tougher

The big picture: AI is blurring the usual indicators that central bankers rely upon to set policy, a new paper from a leading international body finds, simultaneously affecting the supply and demand sides of the economy and driving both structural and cyclical change. * The upshot, per the Bank for International Settlements -- the Basel, Switzerland-based central bank for central banks -- is that the rules of thumb on which policymakers have long relied are all being shuffled at once. State of play: In the U.S. and other hotbeds of AI innovation, an investment boom in the near term is creating a surge in demand, especially for semiconductors and other components of data centers. * A stock market boom, meanwhile, is creating more consumer demand by increasing paper wealth. There are concerns that some of this wealth is illusory, however, and that there is an AI bubble that will eventually pop. * There are risks that AI will result in large-scale job losses in the medium term, though there is only murky evidence of whether it's starting to happen. * And a world in which AI advances create much more productivity growth implies a positive supply shock, which should bring down inflation. What they're saying: "The considerable uncertainty surrounding the effects of AI raises several challenges for monetary policy and financial stability," wrote BIS economists Iñaki Aldasoro, Leonardo Gambacorta, Enisse Kharroubi and Matthias Rottner. * "For one, AI simultaneously affects demand and supply, in both cyclical and structural ways," they wrote. "Moreover, the effects differ across sectors, complicating the assessment of underlying trends." * "Greater uncertainty increases the risk of policy miscalibration." Zoom in: AI is likely to have varied economic effects on unobservable variables that are keys to modern macroeconomic policy, like the natural rates of interest and unemployment. * Central banks, including the Federal Reserve in its policy meeting ending Wednesday, and the Bank of England and Bank of Japan both meeting Thursday, essentially must make real-time decisions on what direction the AI boom is shifting those variables, in what magnitude, and on what timeline. * If they overestimate supply gains or underestimate the demand pressures created by AI investment and wealth effects, they could leave rates too low and stoke inflation, or make the opposite mistake and accidentally engineer a recession. Of note: Fed chairman Kevin Warsh has formed task forces to study the Fed's strategy -- one explicitly focused on the impact of AI on the labor market and productivity, and others that relate to these issues like inflation measurement and economic data collection.

Global Market | AI boom could complicate central banks' inflation assessment, monetary policy decisions: BIS

Artificial intelligence complicates economic assessments for central banks globally. The technology simultaneously boosts demand and expands future supply potential. Policymakers face an unusually complex environment as AI impacts investment and trade. Distinguishing AI-driven growth from overheating economies presents a key challenge. Monetary policy misjudgements risk increasing as economies adjust to AI expansion. The artificial intelligence boom could make it increasingly difficult for central banks to assess the true state of the economy and determine the appropriate path for interest rates, as the technology is simultaneously boosting demand while expanding future supply potential, the Bank for International Settlements (BIS) said, as per a Reuters report. In a bulletin examining the economic impact of artificial intelligence, the global central bank umbrella body highlighted that policymakers face an unusually complex environment as AI-driven investment, trade flows and financial market movements are accelerating before widespread productivity gains become fully evident. US MarketsPowered By As on 29 Jul 2026, 01:30 AM IST S&P 500 Top Gainers IQVIA Hldgs242.94(13.94%) Incyte129.93(9.30%) Sherwin-Williams354.27(8.25%) Workday159.69(8.24%) Gainers" S&P 500 Top Losers Corning126.01(-12.10%) Carrier Global63.16(-8.90%) Micron Technology820.53(-8.85%) Coterra Energy32.56(-8.62%) Losers" According to the report, the current wave of AI spending, which is increasingly being supported by debt financing, is already lifting economic activity, boosting trade and driving gains in equity markets. These developments could contribute to short-term inflationary pressures by strengthening demand. However, the longer-term impact of AI could be disinflationary if the technology improves productivity and expands economic capacity. By increasing efficiency and output potential, AI could help ease inflation pressures over time, though the scale, timing and distribution of these benefits remain uncertain. The BIS said that the simultaneous impact of AI on both demand and supply could blur traditional economic signals, making it harder for central banks to accurately assess underlying conditions and calibrate monetary policy. A key challenge for policymakers is distinguishing between growth driven by AI-related investment and signs of an overheating economy. Large-scale spending on data centres, advanced chips and digital infrastructure could push economic activity higher, but some of this expansion may reflect future improvements in productive capacity rather than excessive demand, the report stated. At the same time, productivity gains from AI could conceal underlying demand pressures, complicating efforts to interpret inflation trends and determine whether monetary policy needs to remain restrictive. The BIS also pointed to uneven effects of AI adoption across countries and labour markets. Economies with strong positions in semiconductor manufacturing, computing infrastructure and AI-related services could benefit from stronger growth, while countries with limited exposure to these industries may see fewer gains. Such differences could create diverging growth and inflation patterns across economies, adding another layer of complexity for central banks operating in different regions. Financial markets present another area of concern. AI optimism has contributed to sharp gains in technology stocks and broader equity markets, creating wealth effects that could support consumer spending and economic activity. However, the BIS warned that elevated valuations also increase the risk of asset price bubbles. The BIS did not propose specific policy measures but emphasised that central banks would need to separate temporary AI-driven investment surges from sustainable productivity improvements. Failure to do so could increase the risk of monetary policy misjudgements as economies adjust to the rapid expansion of artificial intelligence.