NEW YORK, Tuesday, July 2, 2024- The Bank for International Settlements (BIS) issued a stark warning on Monday, highlighting significant threats to global financial stability. The report, titled “Challenges Ahead,” emphasizes the dangers posed by unsustainable government debt trajectories and potential supply-side disruptions.
The BIS Report can be read here.
The BIS points to rising public debt as the most critical long-term threat. Even if interest rates normalize, current debt levels relative to economic output will continue to rise, the report warns. This challenge is further amplified by factors like population aging, the green energy transition, and increased military spending.
High debt levels restrict the flexibility of central banks to manage inflation. Aggressive interest rate hikes aimed at curbing inflation could exacerbate the fiscal situation by making it more expensive for governments to service their debt.
The report also underscores the vulnerability of the financial system to sovereign debt issues. A potential loss of confidence in government creditworthiness could trigger financial stress and destabilize the banking sector.
The BIS warns that disruptions in global supply chains, coupled with a potentially slower-growing global economy, could lead to persistent inflationary pressures. Technological advancements, including artificial intelligence, may also contribute to these challenges.
The report underscores the unpredictable nature of future economic challenges for central banks. It recommends adapting monetary policy frameworks to prioritize robustness, realistic goals, safety margins, and adaptability.
