By Marc Jones
LONDON (Reuters) – The Bank for International Settlements (BIS) has warned that escalating trade tensions and geopolitical conflicts are threatening to expose deep fault lines in the global financial system. In its latest assessment of the world economy, the BIS, often referred to as the central bankers’ central bank, highlighted the risks posed by the U.S.-driven trade war and other policy shifts that are challenging the established economic order.
AgustÃn Carstens, the outgoing head of the BIS, emphasized that the global economy is at a critical juncture, entering a new era of heightened uncertainty and unpredictability. This uncertainty is not only testing public trust in institutions, including central banks, but also creating a challenging environment for policymakers.
The BIS report comes at a crucial time, just ahead of U.S. President Donald Trump’s trade tariff deadline of July 9 and amidst ongoing geopolitical turmoil. Despite Trump’s public criticisms of U.S. Federal Reserve Chair Jerome Powell, Carstens acknowledged that friction between governments and central banks is not uncommon and can be expected at certain points in time.
The BIS annual report, which was published recently, serves as an important barometer of central bankers’ perspectives on the global economy. Carstens expressed concerns about rising protectionism and trade fragmentation, which are exacerbating the long-term decline in economic and productivity growth. He also highlighted factors such as population aging, climate change, geopolitics, and supply chain disruptions that are contributing to a more volatile economic environment.
The report also indicated that the post-COVID spike in inflation has had a lasting impact on public perceptions about price movements. Additionally, high and increasing levels of public debt are making the financial system more vulnerable to interest rate fluctuations and limiting governments’ ability to respond effectively to crises.
Carstens warned against the continuation of the trend of rising debt levels, suggesting that increased military spending could further exacerbate the situation. Hyun Song Shin, the BIS’s chief economic adviser, noted the significant decline in the value of the U.S. dollar, which has dropped by 10% since the beginning of the year, marking its largest first-half decline since the 1970s.
Despite concerns about the dollar’s decline, Shin stated that there is no evidence of a significant shift away from U.S. assets at this time. However, he noted that non-U.S. investors hedging their holdings of Treasuries and other U.S. assets have contributed to the dollar’s recent slide.
In a separate report, the BIS issued a stark warning about the rapid growth of stablecoins in the financial sector. The organization also disclosed its financial performance, revealing a net profit of 843.7 million IMF SDR ($1.2 billion) and a total comprehensive income of SDR 3.4 billion ($5.3 billion). Carstens emphasized the importance of maintaining the BIS’s high creditworthiness in the global financial system.
Overall, the BIS report underscores the challenges facing the global economy and the need for coordinated policy responses to address the evolving risks and uncertainties. As the world navigates a complex and rapidly changing economic landscape, the role of central banks and international institutions like the BIS will be crucial in maintaining stability and promoting sustainable growth.
(Reporting by Marc Jones. Editing by Jane Merriman)
