BIS report flags debt, AI, stablecoin risks for stability

The report's first chapter, 'Progress and Peril,' details how global resilience was tested by geopolitical conflicts, including the persistent economic effects of the Iran conflict and the unprecedented blockade of the Strait of Hormuz.

These events shifted inflation and policy outlooks, leading to an inflation comeback.

The report also examines the AI progress and investment boom, noting its potential for long-term growth but also raising questions about its sustainability and risks to labor markets.

Financial vulnerabilities are highlighted as potential amplifiers, with rich equity valuations and corporate credit becoming sources of macroeconomic vulnerability.

Fiscal positions are under increasing strain, cutting fiscal space and growing vulnerability on multiple fronts, posing challenges to monetary policy.

Chapter II, 'High public debt and shifting financial markets,' details challenges for central banks.

It notes near record-high public debt and evolving fiscal space, creating a new fiscal-financial stability nexus.

The report highlights the increasing role of non-bank financial institutions (NBFIs) in government bond markets, impacting market functioning and fiscal policy interactions.

It also addresses international spillovers, such as the FX-repo link, and how fiscal and financial risks reach central banks, affecting monetary policy transmission.

The BIS suggests confronting these emerging policy challenges through monetary policy, fiscal policy, and regulation.