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The Bank for International Settlements warned Sunday that the global economy faces multiple "pressure points," from inflation fueled by the Middle East war to concerns over cooling artificial intelligence investments, posing risks to financial stability.
In its annual report, the BIS, often described as the central bank of central banks, urged monetary policymakers to "act now" to help safeguard global economic stability.
BIS Deputy General Manager Andrea Maechler acknowledged that central banks were operating in a difficult environment.
"Central banks are already facing a complex situation in a world marked by a great deal of uncertainty," she told Agence France-Presse (AFP) in an interview.
The BIS identified four major pressure points for the global economy, starting with inflation linked to the Middle East war, which began with U.S.-Israeli strikes on Tehran on Feb. 28.
The resulting closure of the Strait of Hormuz, one of the world's most important energy chokepoints, has disrupted global energy supplies and raised costs for products ranging from plastics to fertilizers.
The BIS also pointed to concerns over the durability of the artificial intelligence investment boom, which has supported global growth and helped the economy withstand recent shocks, including last year's tariff hikes.
The report warned that surging AI capital expenditure could prove "unsustainable," raising the risk of a financial market correction.
The report also highlighted the dangerous combination of persistent financial vulnerabilities and "exuberant risk appetite" in financial markets, warning that the situation "could unwind abruptly."
Higher public debt levels also pose challenges for central banks, the BIS said, as policymakers could find themselves caught between raising rates to contain inflation and concerns that higher borrowing costs would increase debt-servicing burdens and weigh on growth.
"Each of these areas of tension is likely to be manageable, but taken together, they risk amplifying one another and threatening financial stability," Maechler warned.
She said that "if tensions were to arise on that front, for example, in the event of a change in interest rates or market sentiment, contagion effects could be set in motion."
The BIS also raised concerns over risks linked to the growing role of non-bank players, including hedge funds, in bond markets and AI investments.
It called for stronger oversight of such activity, saying financial regulation should extend beyond traditional banks.
There must be "adequate regulation also beyond the banking perimeter" to ensure such players can absorb the risks they take, Maechler said.
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The BIS also urged governments to reduce debt levels to help preserve central banks' room for maneuver in the event of future economic shocks.
Maechler, a former governing board member at the Swiss National Bank, said it was vital for central banks to "be able to carry out their mandate with complete independence."
That independence is needed, she said, "to defend this fundamental public good, namely price stability and confidence in money, without which an economy cannot function well."
Maechler said, "central banks know that they may have to make difficult decisions that would not have political support at the time they need to be made."
"For this, they need this independence," she said.
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