AI will have a transformative effect on the financial system, labour markets, productivity and economic growth, says the BIS in a new report which warns that widespread adoption could have repercussions for inflation dynamics.

"The rapid and widespread adoption of AI implies that there is an urgent need for central banks to raise their game," says the BIS. "Central banks need to upgrade their capabilities both as informed observers of the effects of technological advancements as well as users of the technology itself."

As a user of the technology, central banks can boost nowcasting by using real-time data to better predict inflation and other economic variables and to sift through data for financial system vulnerabilities, allowing authorities to better manage risks.

Hyun Song Shin, head of research and economic adviser at the BIS says: "Vast amounts of data could provide us with faster and richer information to detect patterns and latent risks in the economy and financial system. All this could help central banks predict and steer the economy better."

In the financial sector, the report says that AI can improve efficiencies and lower costs for payments, lending, insurance and asset management. However, the technology also introduces risks, such as new types of cyber attacks, and may amplify existing ones, such as herding, runs and fire sales.

The report concludes that the scale of the impact that AI will have means that there is an urgent need for central banks to collaborate in fostering the development of a community of practice to share knowledge, data, best practices and tools about the issue.

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