Trade disputes and increasingly strained global politics are threatening to reveal serious vulnerabilities in the world’s financial framework, according to the latest report from the Bank for International Settlements (BIS), the key coordinating body for central banks, reports RTE.
AgustÃn Carstens, the outgoing chief of the BIS—often described as the “central bank for central banks”—warned that the U.S.-led trade conflicts and evolving policy directions were undermining the stability of the long-standing global economic system.
Carstens described the global economic landscape as being at a “pivotal moment,” entering a “new era of heightened uncertainty and unpredictability.” This shift, he noted, was challenging the credibility of institutions, including central banks, reports RTE.
The BIS report comes just over a week before the U.S. sets its next round of trade tariffs on July 9, and follows half a year marked by major geopolitical instability.
When questioned about President Trump’s pointed remarks toward Federal Reserve Chair Jerome Powell—including calling him “stupid”—Carstens avoided harsh criticism, reports RTE.
“It is to be expected at certain points in time that there will be friction,” former Mexican central bank governor Carstens told reporters, referring to the relationship between governments and central banks. “It is almost by design”, reports RTE.
The BIS’ annual publication, released yesterday, carries weight in global financial circles due to the institution’s role in hosting regular meetings with top monetary policymakers.
Carstens expressed particular concern about growing protectionism and the fragmentation of global trade, which he said were worsening a long-running trend of slowdowns in economic and productivity growth, reports RTE.
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He also pointed to growing evidence that the global economy is becoming less able to absorb shocks, citing factors such as demographic shifts, climate change, geopolitical strife, and supply chain disruptions.
According to the report, inflation spikes after the Covid-19 pandemic appear to have had a lasting effect on how the public perceives price fluctuations, reports RTE.
Some social media users in Ireland say that Ireland could face a recession, as a result of conflicts and financial events that are simply out of our control.
Rising levels of government debt are also adding stress to the financial system, increasing sensitivity to interest rate changes and leaving governments with less room to manoeuvre during future crises.
U.S. stock markets extended their gains on Friday, pushing the S&P 500 and Nasdaq to record closing levels with 0.5% increases, while the Dow rose by 1%, reports RTE.
“This trend cannot continue,” Carstens said referring to the rising debt levels and he said that higher military spending could push the debt up further, reports RTE.
Hyun Song Shin, the BIS’s chief economic adviser, also highlighted the steep decline in the U.S. dollar, which has dropped 10% since the beginning of the year—its largest half-year fall since the introduction of floating exchange rates in the 1970s.
Shin said there was no indication yet that this marked the beginning of a “great rotation” away from U.S. assets, as some analysts have speculated, though he noted that sovereign wealth funds and central banks tend to act slowly, reports RTE.
However, in the shorter term, analysis showed that “hedging” by non-U.S. holders of Treasuries and other American assets likely played a “significant role” in the dollar’s recent decline.
“We haven’t seen anything (yet) that would give us any cause for alarm,” Shin added, reports RTE.
The BIS had already issued an earlier section of its report last week, which delivered a strong caution over the rapid expansion of so-called stablecoins, reports RTE.
In terms of its own operations, the BIS reported a net profit of $1.2 billion, while its total comprehensive income hit a record $5.3 billion, and currency deposits also reached new heights, reports RTE.
“It is important that the BIS has the highest creditworthiness out there,” Carstens said, reports RTE.
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