The Bank for International Settlements (BIS) has warned that rising public debt, financial market fragilities and uncertainties around the artificial intelligence investment boom are increasing risks to global financial stability, reported Reuters. The central bank umbrella body said these pressures, combined with supply shocks and inflation risks, require urgent and disciplined policymaking across economies.
The BIS made the remarks in its Annual Economic Report released on Sunday. It said global economic activity remained resilient in recent months, but underlying vulnerabilities continued to build across fiscal systems, financial markets and supply chains.
“Policy actions must reinforce each other to avoid a pull and push on the global economy. Ultimately, success depends on sound fiscal and financial foundations,” BIS General Manager Pablo Hernández de Cos said, as reported by Reuters.
The report identified a mix of risks that could weaken global stability. These included high public debt levels, renewed inflation pressures, fragile bond markets and uncertainty over the long-term impact of artificial intelligence-driven investment.
Why are inflation and debt risks rising again?
The BIS said inflation pressures have returned in several economies. It warned that frequent supply disruptions could push inflation expectations higher among households and businesses, making price control more difficult for central banks.
“The readiness to act if the central banks observe that there is the anchoring of inflation expectations is the main message that we want to set,” de Cos said.
The report also raised concerns about government debt levels. It said record-high borrowing in several major economies created risks for sovereign bond markets, especially as large hedge funds and non-bank financial institutions now play a bigger role in financing debt.
Frank Smets, acting head of the BIS monetary and economic department, said this shift created a new set of risks. “The new fiscal-financial stability nexus may mean more frequent and sharper drops in sovereign bond values,” he said. He added that such movements could tighten financial conditions quickly and affect global markets, reported Reuters.
Is AI boom creating new financial risks?
The BIS said the global surge in artificial intelligence investment supported economic growth and boosted expectations of higher productivity. However, it also warned that the boom carried risks of overinvestment, similar to past technology cycles.
It said uncertainty remained over whether the rapid rise in spending on AI infrastructure and related sectors would deliver long-term returns. It also flagged concerns about the job displacement, supply chain bottlenecks and intense competition across the technology sector.
The report said these factors could lead to boom-and-bust cycles in investment if expectations turn out to be unrealistic.
The BIS also urged central banks and regulators to strengthen oversight beyond traditional banking systems, as financial risks now extend across non-bank intermediaries, asset managers and complex funding networks.
What did BIS say about global policy response?
The BIS called for stronger coordination between monetary, fiscal and regulatory policies. It said central banks must focus on price stability while governments work to restore fiscal balance.
It warned that delays in action would make adjustments more painful in the future. “Policymakers must act now. Delay will only make the necessary adjustments more costly,” de Cos said.
The report also welcomed easing tensions in global energy markets after a ceasefire between the United States and Iran and the reopening of the Strait of Hormuz. It said these developments reduced the risk of extreme oil price shocks, although markets would still take time to stabilise.
The BIS urged governments to reduce debt, strengthen financial supervision and pursue structural reforms to support long-term stability. It said global risks now interact more closely, making coordinated action more important than ever.