20 October 2023 , 10:26
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A study has found that artificial intelligence (AI) can help predict future Bank of England interest rate decisions. Researchers at Sheffield Hallam University used an AI program, ChatGPT, to analyse speeches made by Bank policymakers.
The team examined speeches made between 1997 and June this year, all of which were delivered before interest rate decisions. The AI was able to correctly predict the outcome of these decisions 32% of the time, a result the researchers deemed "significant".
According to the researchers, any result above 10% in social science statistical predictions is considered robust. Using ChatGPT, they categorised each of the 705 speeches as either dovish, neutral or hawkish.
Hawks are those who favour higher rates to control inflation and growth, while doves prefer lower rates to support growth and inflation. The study also found that Committee members who gave more neutral speeches were more likely to vote for interest rate hikes at subsequent meetings.
The researchers would then run these findings through a model, adding in extra details such as how long the Monetary Policy Committee (MPC) member has been on the rate-setting panel, their previous votes and whether they are an internal Bank employee or external member. This would then predict how each member was likely to vote at the next one or two policy meetings.
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Drew Woodhouse, senior lecturer in economics in Sheffield Business School and lead author of the research, said: "Our findings highlight the predictive potential of tools like ChatGPT for processing human beliefs and expectations."
"This has major implications for forecasting policy decisions and modelling economic expectations."
He told the PA news agency that they hope AI programmes such as ChatGPT can "empower people".
"AI can in the future become an everyday tool for the public, in particular for things like financial decision making," he said.
The researchers said their approach to analysing Bank of England speeches could also be extended to other areas of central bank communications, such as forward guidance, where policymakers give information on the likely future course of monetary policy.
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