Rising government debt may push financial stability off track, BIS warns

Governments worldwide should go slow on fiscal borrowings to bring stability to the global financial system, while striving for a low inflation ecosystem, the Bank for International Settlements (BIS) said.

Swift and decisive action by global central banks have shown their commitment to fulfil their mandates, helping limit the second-round effects of higher inflation and preventing a shift to a high-inflation regime, BIS, the central bank of central banks, said in its annual report.

But “despite central banks’ efforts, numerous forces, including loose fiscal policy, a potential catch-up in real wages and possibly a premature easing of financial conditions, are pulling in the opposite direction. Even when inflation does return to target, a soft landing is not guaranteed, Agustín Carstens, general manager at BIS, said in the foreword to the annual report.

This is no time for complacency, and policymakers need to stay alert to the risks, Carstens wrote.

“Public debt is at record highs and fiscal deficits remain too large in many countries despite the resilience of the economic cycle. While a more strongly capitalised banking sector has broadly proved it can withstand a slowdown, a period of sustained higher rates cannot be excluded,” he said. “Given that financial amplification channels are particularly hard to predict, we cannot rule out further risks as pressures on borrowers mount as loans mature and debt is refinanced.

BIS said its economic analysis “has shed new light on evolving inflation dynamics” and “probed risks to financial stability.”

Meetings held as part of the global coordination through the Basel Process have provided a platform for discussion and collaboration to further strengthen the resilience of the financial system and shape the financial landscape of tomorrow, Carstens wrote.

“And our global network of BIS Innovation Hub teams has continued to explore leading-edge technology to develop future financial architecture,” he added.