UBS creates AI tool to monitor interest rate cuts
UBS has created an AI model that takes a view on central bank’s hawks and doves when interest rates are set in a bid to cut through the noise of hard-to-read press conferences.
In a new policy paper spanning 38 pages, the Swiss bank revealed that its new tool is adept at “measuring the tone of central bank communication” and pointing out which datasets policymakers are taking a closer look at.
The tool was created in response to the tendency of rate-setters to deliver speeches, press conferences and publish papers outlining their views on monetary policy.
The increased use of social media by central bank officials has also played into communication around decisions, according to economists at UBS.
Christine Lagarde, president of the European Central Bank (ECB), for example, boasts nearly 1m followers on X while Bank of England Governor Andrew Bailey appeared in interviews conducted by social media influencers as part of a media round in early May.
UBS said there has been an “increasing strategic weight placed on communication” among some of the world’s most important central banks, with AI being used because it made “document scoring easier”.
Its initial analysis, which was published in a policy paper titled ‘Deep Speak’, claims that the ECB’s views on interest rate cuts is “rapidly softening” as concerns about low growth mount.
It also said the US Federal Reserve, led by under-fire chair Jerome Powell, was generally hawkish as it compared how different economic indicators drove sentiments among governors.
Largarde’s increasingly hawkish comments after late 2022 drove the “aggregate tone” of the ECB, the AI tool also found.
The policy paper, which was released in mid-May, did not analyse the Bank of England’s Monetary Policy Committee.
It might face a tougher job should its large language model consider comments made by rate-setters at the Bank.
Catherine Mann, who was widely viewed as a dove prior to the May interest rates decision, voted to hold interest rates, stunning MPC watchers.
Chief economist Huw Pill, who also voted to hold interest rates at the last meeting despite market expectations making strong predictions that all MPC members would vote for a cut, appeared to take a swipe at the Bank’s communications policy in a speech on Tuesday morning.
He told an audience of investors and economists at Barclays that he opted to take a more “cautious” approach to rate-setting, taking aim at the Bank’s “careful and gradual” mantra.
Interest rate policy clouded by poor communication
Pill appeared to suggest that central banks have focussed too much on getting communication right rather than allowing themselves to be flexible with forecasting and usage of data.
“Too much transparency can come at the cost of clarity,” he said.
The move makes UBS the latest bank to incorporate the use of LLM tools into the work of staff.
US banks are incorporating AI at a rapid pace, according to a recent survey, while Bank of England officials have warned that the use of the technology in trading could make market shocks more intense.
The Standard reported last year that a senior JP Morgan executive was using AI to auto-generate email responses.