Much has been made of the potential of predictive AI technologies. Modern AI innovations are of the generative type, capable of spawning something entirely new from a vast database. Sentience and a sense of right and wrong seem to be something unique to humanity, and AI innovations continue to struggle to replicate this trait fully. On the other hand, predictions do not appear to be completely impossible for AI.
What Is Interest Rate?
Interest rates are the cost of borrowing from a lender. Interest rates on loans are usually noted annually and are referred to as APR (Annual Percentage Rate). Interest rates may also apply to the amount earned at credit unions or banks from Certificates of Deposit or savings accounts. Here, the interest earned on these accounts is referred to as APY (Annual Percentage Yield). Central banks determine interest rates. For instance, in the USA, the Federal Reserve sets the interest rate.
How Do Interest Rates Determine Monetary Policy?
Central banks often set high reserve requirements and tighten the monetary supply in a bid to fight inflation. This is often the case when there is great demand for credit. In such scenarios, consumer spending power reduces, and the stock market suffers because investors prefer to capitalise on the increased rate from savings rather than invest in the stock market that offers lower returns. Businesses will also have restricted access to capital funding through debt, which leads to economic contraction.
What Is Predictive AI?
Predictive AI is a data analysis method that is capable of anticipating or predicting future needs or events for organisations. This involves assessing coming trends, foreseeing risks, and recommending solutions. The accuracy of predictive AI algorithms and models depends on the data it is trained on. Without this big data, it is impossible to model effective and useful predictions. Predictive AI has several use applications in different fields, including retail, pharmaceuticals, insurance, tourism, and event management.
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How Does Predictive Analysis Work?
Predictive analysis is the use of statistics and modelling techniques to make predictions about future performance and outcomes. It examines patterns in present and historical data to assess the likelihood of recurrence. This allows investors and businesses to adjust when using resources to take advantage of these possible future events. Machine learning also falls under the realm of predictive AI. It is similar to predictive analysis, only this time, it involves training computers to understand patterns in big data for making future predictions.
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What Is Machine Learning?
Machine Learning (ML) is a type of Artificial Intelligence (AI) focused on developing computer systems that learn from big data and improve performance and results over time. Machine learning algorithms are designed to find patterns and relationships in data sets. They also use historical data to cluster data points, classify information, reduce dimensionality, and make predictions. The technology applies across various applications, including news organisations, social media, and e-commerce.
The Bank of England Experiment
According to research carried out at the Sheffield Business School at Sheffield Hallam University, AI can be used to predict future interest rates. The study used ChatGPT to analyse several speeches made by policymakers from the Bank of England between 1997 and 2023. It found that ChatGPT could help predict interest rate decisions with an accuracy of about 32%. In social science statistical predictions, any result exceeding 10% is robust, which gives new significance to the ChatGPT research.
The researchers categorised each of the 705 speeches as either hawkish, neutral, or dovish neutral. The hawks are the ones who favour tight monetary policies, while doves are the opposite, tending toward inflationary measures. The findings were run through models, including variables such as the previous votes of the Monetary Policy Committee members and how long they’d been on the rate-setting panel. This data was then used to predict how each member was likely to vote at the next one or two policy meetings.
Other Research Findings
Aside from the Bank of England research, other research has been done on the viability of AI predictions regarding future interest rate decisions. Hajar Lmouaddene of Al Akhawayn University assessed the difficulty in predicting interest rates as stemming from two things. First, interest rates are volatile, making it hard to link them to economic fundamentals. Second, interest rates rely on various factors, such as the economic policies in each country. The research involved the development of a deep-learning model using neural networks to predict interest rates. Furthermore, a Missouri University of Science and Technology paper on predictive AI and interest rate spreads showed that neural network modelling and forecasting of economic recessions by means of interest rate spread was viable.
The Future of Predictive AI Technologies
Big tech companies are already using predictive AI technologies to improve their software products and make them more consumer-oriented. Although AI technologies may have several limitations, it appears that using them to predict future interest rate decisions is not one of them. In the future, we can anticipate even more robust uses of the technology, even as it continues to evolve.