The Bank for International Settlements (BIS) has warned that artificial intelligence is creating an unusually complex environment for central banks globally. According to the latest BIS report released on Tuesday, AI simultaneously boosts demand while expanding future supply potential, making it increasingly difficult for policymakers to assess economic conditions accurately. The current wave of AI spending, increasingly supported by debt financing, is already lifting economic activity, boosting trade and driving gains in equity markets, creating short-term inflationary pressures by strengthening demand. As the BIS report notes, "AI affects both demand and supply, blurring the signals of the business cycle," warning that this could lead to policy miscalculation if central banks misread temporary investment booms as lasting overheating. The technology stimulates investment, trade, and financial markets even before noticeable long-term increases in productive potential become evident.
Despite short-term pressures, the BIS report indicates that AI's longer-term impact 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. However, the simultaneous impact on both demand and supply could blur traditional economic signals, making it harder for central banks to accurately assess underlying conditions. A 2023 working paper from the National Bureau of Economic Research found that AI adoption could raise productivity growth by 1.5 percentage points annually over a decade, though the transition may involve significant labor market disruptions and investment volatility. The challenge lies in the highly uncertain scales, pace, and distribution of these gains for policymakers.
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 expansion may reflect future improvements in productive capacity rather than excessive demand. The BIS highlighted specific risks in the current environment, warning that central banks face the risk of "policy calibration errors" if they misinterpret short-term AI-driven growth as permanent economic overheating. The global central bank body emphasized that "if a central bank misinterprets the short-term growth driven by AI investment as an overheating economy, it might raise interest rates excessively, stifling economic vitality," while conversely, "if it overestimates the long-term productivity-enhancing effects of AI, it might overlook the inflationary pressures accumulating from the investment boom." The current AI investment boom risks overcapacity, supply shortages and reduced demand, potentially triggering a funding pullback and wider financial instability.
Financial markets present another area of concern as 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, adding complexity to monetary policy decisions. 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 appropriately. The BIS emphasized that central banks would need to separate temporary AI-driven investment surges from sustainable productivity improvements, warning that failure to do so could increase the risk of monetary policy misjudgements as economies adjust to the rapid expansion of artificial intelligence.
The BIS pointed to uneven effects of AI adoption across countries and labour markets, with economies having strong positions in semiconductor manufacturing, computing infrastructure and AI-related services benefiting from stronger growth. Countries with limited exposure to these industries may see fewer gains, creating diverging growth and inflation patterns across economies. Such differences could add another layer of complexity for central banks operating in different regions, forcing them to navigate increasingly asynchronous cycles similar to the post-financial crisis divergence between advanced and emerging economies. The uneven impact of AI across countries and labor markets means countries that supply semiconductors, computing infrastructure, or AI services may experience faster growth, while others may lag, leading to different inflation and growth trajectories across jurisdictions and complicating the global alignment of monetary policy. The BIS specifically warned that "this divergence will lead to different inflation and growth trajectories across nations, further increasing the complexity of coordinating cross-border monetary policy."
