Key events
It’s tempting to speculate whether artificial intelligence could do a better job of setting interest rates than the Bank of England.
Yesterday, the BoE’s policymakers were split three ways on monetary policy, with two voting to raise interest rates, one pushing for a cut, and the other six deciding rates should remain at 5.25%.
The Bank appears to be inching towards a rate cut fairly soon; it wants more evidence that inflation will fall back to its 2% and then stay there.
The City money markets predict the first rate cut will come by June, but that there’s a 10% possibility it might be as early as March.
So, I asked ChatGPT when the Bank might cut rates – and it provided some situations under which monetary policy could be eased:
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Economic Downturn: If there is a significant economic downturn or recession, the Bank of England may lower interest rates to stimulate borrowing, spending, and investment. Lower interest rates can encourage consumers and businesses to borrow and spend, thereby boosting economic activity.
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Inflation Below Target: If inflation is consistently below the target set by the central bank, it may choose to cut interest rates to encourage spending and investment, which can help push inflation towards the target.
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Global Economic Uncertainty: External factors, such as global economic uncertainty or financial market turbulence, can also influence the Bank of England’s decisions. Cutting interest rates in such situations can be a preemptive measure to support the economy and financial stability.
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Exchange Rate Considerations: The central bank may also consider the impact of interest rate changes on the exchange rate. Lower interest rates may lead to a depreciation of the currency, which can benefit exports and contribute to economic growth.
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Credit Conditions: If there are signs of tightening credit conditions that could restrict borrowing and investment, the central bank might lower interest rates to make borrowing more attractive and accessible.
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Unemployment Concerns: If there are concerns about rising unemployment, the central bank might use interest rate cuts to stimulate economic activity and job creation.
The UK government doesn’t accept the claim that it is “too focused on a narrow view of AI safety”, as the House of Lords Communications and Digital Committee warns.
Responding to their report, a spokesperson from the Department for Science, Innovation and Technology (DSIT), said:
“We do not accept this – the UK is a clear leader in AI research and development, and as a Government we are already backing AI’s boundless potential to improve lives, pouring millions of pounds into rolling out solutions that will transform healthcare, education and business growth, including through our newly announced AI Opportunity Forum.
“The future of AI is safe AI. It is only by addressing the risks of today and tomorrow that we can harness its incredible opportunities and attract even more of the jobs and investment that will come from this new wave of technology.
“That’s why we have spent more than any other government on safety research through the AI Safety Institute and are promoting a pro-innovation approach to AI regulation.”
Last November, PM Rishi Sunak organised the landmark AI Safety summit at Bletchley Park, where attendees signed a declaration that AI should be designed in a human-centric, trustworthy and responsible way.
Lords: UK must not miss out on ‘AI goldrush’
Andrew Bailey’s comments on AI come as a House of Lords Committee warns that the UK risks missing out on the “AI goldrush”, and urges the government to adopt a more positive vision.
The Lords Communications and Digital Committee warns that the UK’s approach to artificial intelligence has become too narrowly focused on AI safety and the threats the technology could pose, rather than its benefits.
In a major report on artificial intelligence and large language models (LLMs) – which power generative AI tools such as ChatGPT – the committee say the technology would produce era-defining changes comparable with the invention of the internet.
However, it warned that the UK needed to rebalance its approach to the subject to also consider the opportunities AI can offer, otherwise it will lose its international influence and become strategically dependent on overseas tech firms for a technology which is expected to play a key role in daily life in the years to come.
It said that some of the “apocalyptic” concerns around threats to human existence from AI were exaggerated, and should not distract policy makers from responding to more immediate issues.
Baroness Stowell of Beeston, Chairman of the House of Lords Communications and Digital Committee, said:
“The rapid development of AI Large Language Models is likely to have a profound effect on society, comparable to the introduction of the internet. That makes it vital for the Government to get its approach right and not miss out on opportunities – particularly not if this is out of caution for far-off and improbable risks.
We need to address risks in order to be able to take advantage of the opportunities – but we need to be proportionate and practical. We must avoid the UK missing out on a potential AI goldrush.
Introduction: BoE governor says AI will not be mass destroyer of jobs
Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.
Artificial Intelligence (AI) technologies have “great potential” for the economy and will not be a “mass destroyer of jobs”, the governor of the Bank of England argues.
After leaving UK interest rates on hold at 5.25% yesterday, Andrew Bailey has said human workers will learn to work with new technologies.
Bailey told the BBC that history shows the benefits of new technology:
“I’m an economic historian, before I became a central banker. Economies adapt, jobs adapt, and we learn to work with it. And I think, you get a better result by people with machines than with machines on their own.
So I’m an optimist…”
Policymakers globally are grappling with the consequences of generative AI – for the jobs market, but also its potential to generate misinformation (not forgetting its habit of “hallucinating” and generating nonsense).
Last month, the International Monetary Fund warned that almost 40% of jobs around the world could be affected by the rise of AI, requiring safety nets to protect those who lose out.
The BoE itself is concerned that rapid developments in artificial intelligence and machine learning could pose risks to the UK’s financial stability; last December it launched a new review into their use across the City.
Many businesses have been flocking to implement AI tech such as chatbots, with nearly a third telling the BOE they have made significant AI investments in the past year.
This week’s flurry of financial results from tech giants has shown the impact.
Microsoft reported a 30% increase in revenues at its Azure plarform on Tuesday night, with artificial intelligence giving 6 percentage point boost.
Satya Nadella, chairman and chief executive officer of Microsoft, declared:
We’ve moved from talking about AI to applying AI at scale.”
But both Microsoft and Google warned that costs are rising as they race to develop cutting-edge AI products.
Also coming up today
The health of the US jobs market is also in focus today, as investors await the latest jobs report from the states.
Investors expect a small slowdown in job creation; January’s non-farm payroll is expected to show 180 new jobs were created, down from the 216,000 in December.
Average hourly earnings are seen rising 0.3% month-on-month (or 4.1% year-on-year).
A strong jobs report would ease concerns that the US economy is slowing, but could also sink hopes that US interest rates would be cut as soon as March.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:
A reasonably weak number should revive the Federal Reserve (Fed) doves, while a strong number should melt the March rate cut expectations.
The probability of a March hike fell to 35% after the Fed said [on Wednesday] that March was probably too early to cut rates – while this probability was around 80% at the start of the year. Everyone is focused on the May meeting now, with more than 90% probability priced in for the first Fed cut.
The agenda
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7.45am GMT: French industrial production report for December
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1.30pm GMT: US non-farm payroll jobs report
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3pm GMT: US factory orders data for December
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3pm GMT: University of Michigan’s US consumer sentiment report
