denis beau : artificial intelligence - a blessing or a curse in the financial sector transformation? speech by mr denis beau, first deputy governor of the bank of france, at an annual event of the bank of france representative office in singapore, singapore, 8 november 2024. * * * ladies and gentlemen, let me start with stating the obvious : the use of artificial intelligence ( ai ) is on the rise. indeed, the possibilities offered by this set of technologies seem immense. ai has underpinned such progress that this year the nobel prize in physics was awarded to two pioneers of artificial neural networks, while the nobel prize in chemistry recognized an application of ai to understand the structure of proteins. in the financial sector, too, ai is increasingly used, for example to assess credit risk, set insurance rates, or estimate asset volatility. this technology is now the main driver of the digital transformation of the financial sector. and this transformation obviously cannot leave the central banker and financial supervisor that i am unmoved. it raises the question of the opportunities and risks of these changes for the financial sector ( i ). and it also raises questions for central banks and financial supervisors about their own operations and their mastery of these new technologies : how will we monitor the use of ai by financial players in the future, and what are the possibilities offered by these technologies for our own activities? ( ii ) let me address those issues briefly and in turn. i / on the first issue of opportunities and risks, let me start with this initial observation to put it in the right perspective : ai, coupled with data science, is a powerful force driving the transformation of the financial sector. 1 / our observations show that ai is increasingly used by financial institutions, in all segments of the value chain. banks use these tools to improve the " user experience ", but also to automate and optimize a number of internal processes. ai is also used to monitor and control risks, as demonstrated by its success in use cases relating to the fight against fraud or money laundering and the financing of terrorism ( aml / cft ). the advent of generative ai over the past two years has been a powerful force accelerating already underway trends. indeed, it has led to a revolution in the accessibility of ai technologies : the ability to interact in natural language with algorithms - via large language models or llms - has made the adoption of new technologies much easier. it is also accelerating innovation momentum within companies, as code writing is no longer

pronounced during the pandemic. in the most recent canadian survey of consumer expectations ( csce ) conducted this past may, respondents indicated that they expected inflation to increase in the short term. in fact, the cpi inflation rate declined sharply over this period and has been below our 1 to 3 percent inflationcontrol range. 2 to examine possible explanations for this gap, the bank has been conducting joint research with statistics canada. in this speech, i will share with you some of the preliminary results before we publish our official findings this fall. and so today, i would like to do three things : • • • first, illustrate and characterize this gap ; second, explore some measurement and behavioural explanations of this disconnect between perception and reality ; and third, examine the implications for monetary policy, including communications to different audiences. low and stable inflation promotes economic prosperity economists define inflation as a sustained increase in the general price level of goods and services in an economy over a period of time. while this concept of inflation seems straightforward, measuring inflation accurately is difficult. the cpi inflation rate is designed to track how much the average canadian household spends and how that changes over time. to this end, statistics canada uses its survey of household spending to estimate the shopping basket 1 see, for example, s. axelrod, d. lebow and e. peneva, “ perceptions and expectations of inflation by u. s. households, ” board of governors of the federal reserve system, finance and economics discussion series no. 2018 - 073 ( october 2018 ) and s. tenreyro, “ understanding inflation : expectations and reality ” ( speech given at the ronald tress memorial lecture, birkbeck university of london, london, england, july 10, 2019 ). 2 one explanation for the higher perceived inflation during the pandemic containment period is that households shifted their spending toward items that experienced higher price increases ( e. g., food ) and away from items that saw lower price increases or declining prices ( e. g., gasoline ). see bank of canada, “ box 2 : adjusted cpi inflation shows only slightly less decline than cpi inflation, ” monetary policy report ( july 2020 ) : 18. another explanation is that price increases have an outsized impact on household perceptions of inflation. - 3of a representative household. this basket consists of about 700 goods and services that canadians typically buy, each with their own weight. 3 measuring cpi inflation is also very important for us at the bank