BY EMMANUEL OGBONNA
The Bank for International Settlements (BIS) has issued a stark warning that the global economy is facing a growing combination of financial and economic risks, urging governments and central banks to adopt disciplined policies to prevent mounting vulnerabilities from developing into a broader crisis.
In its Annual Economic Report released on Sunday, the institution said that although the global economy has remained relatively resilient in recent months, policymakers cannot afford to become complacent. The report highlighted rising public debt, financial market fragility, renewed inflationary pressures and uncertainty surrounding the rapid expansion of artificial intelligence as key threats that require immediate attention.
The BIS, often referred to as the central bank for central banks, said the world economy is navigating an increasingly complex environment marked by strained government finances, lingering supply-chain disruptions and the possibility that inflation could once again become deeply entrenched.
BIS General Manager Pablo Hernandez de Cos stressed that economic stability will depend on governments and central banks working together through coordinated policies rather than pursuing conflicting objectives.
He said fiscal, monetary and financial policies must reinforce one another to avoid placing unnecessary strain on the global economy, emphasizing that long-term success ultimately depends on maintaining strong fiscal discipline and resilient financial systems.
One of the institution’s primary concerns is the recent resurgence of inflation. Although inflation has eased from the peaks experienced in recent years, the BIS warned that repeated supply disruptions—whether caused by geopolitical tensions, climate-related events or trade disruptions—could once again push prices higher and alter public expectations about future inflation.
According to the report, if households and businesses begin to believe that high inflation will persist over the long term, it could become significantly more difficult for central banks to restore price stability.
Hernandez de Cos emphasized that central banks must remain prepared to respond quickly if inflation expectations begin to drift away from their targets. He said maintaining confidence in price stability remains one of the most important responsibilities of monetary authorities.
The report also addressed recent geopolitical developments, noting that the ceasefire between the United States and Iran and the reopening of the Strait of Hormuz have reduced the immediate risk of severe disruptions to global energy supplies.
Hernandez de Cos described those developments as positive news because they lessen the likelihood of worst-case scenarios for oil markets. However, he cautioned that energy markets may still require time to fully stabilize after the recent period of heightened uncertainty.
Another major focus of the report was the rapid expansion of investment linked to artificial intelligence.
The BIS acknowledged that advances in AI have boosted business confidence and strengthened expectations for higher productivity, encouraging companies and investors to commit substantial resources to the sector.
At the same time, however, the institution warned that the AI investment boom carries significant risks. The report cautioned that intense competition, supply bottlenecks and rapidly rising capital expenditures could create conditions similar to previous technology bubbles, where excessive investment ultimately resulted in sharp market corrections.
The report also noted that artificial intelligence is raising broader economic questions beyond investment alone. Policymakers continue to assess how AI may reshape labor markets, alter productivity growth and influence inflation over the long term.
While acknowledging these uncertainties, Hernandez de Cos said it would be premature for central banks to adopt fixed policy responses before gaining a clearer understanding of AI’s long-term economic effects.
Financial market vulnerabilities were identified as another growing source of concern.
According to the BIS, elevated asset prices and increasing signs of investor complacency have made core bond markets more susceptible to sudden swings in sentiment. The institution also warned that financing for many AI-related projects is becoming increasingly dependent on debt financing and complex funding arrangements throughout the technology supply chain.
The report further highlighted the rapid growth in public borrowing around the world. Many governments now carry record levels of debt, while sovereign bond markets are increasingly influenced by highly leveraged investment funds and other non-bank financial institutions.
The BIS described this evolving relationship between government borrowing and financial markets as a new “sovereign-financial stability nexus,” warning that it could amplify future market volatility.
Frank Smets, acting head of the BIS Monetary and Economic Department, said this new dynamic may lead to more frequent and sharper declines in government bond prices, which could quickly tighten financial conditions across the global economy and increase borrowing costs for governments, businesses and households alike.
Hernandez de Cos delivered what he described as an urgent message regarding the need to reduce debt burdens in major economies. He warned that today’s elevated debt levels are increasingly financed through non-bank financial intermediaries rather than traditional banking institutions, creating additional risks that regulators must carefully monitor.
To reduce the likelihood of future financial instability, the BIS called on policymakers to maintain a strong focus on controlling inflation, restoring sustainable public finances and strengthening oversight of the broader financial system beyond commercial banks.
The institution also urged governments to pursue structural economic reforms aimed at improving long-term productivity, strengthening economic resilience and ensuring financial markets remain capable of supporting sustainable growth.
Despite acknowledging that the global economy has so far demonstrated resilience in the face of multiple shocks, the BIS concluded that the combination of high public debt, persistent inflation risks, evolving financial vulnerabilities and uncertainty surrounding artificial intelligence requires decisive action. Without coordinated and disciplined policymaking, the report warned, these pressures could undermine global economic stability in the years ahead.
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