BIS Warns AI Boom, Record Debt, and Inflation Risks Are Straining the Global Economy

The Bank for International Settlements issued a broad warning on Sunday, flagging a complex web of vulnerabilities — from surging public debt and elevated asset valuations to the uncertain durability of the current artificial intelligence investment surge — that it said are increasing risks for the global economy.

The central bank umbrella group's Annual Economic Report, published June 28, identified four key pressure points: renewed inflationary pressures, financial fragilities, fiscal instability, and structural questions raised by the AI boom.

"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 Hernandez de Cos said in the report.

On inflation, the BIS cautioned that more frequent supply disruptions could cause higher price expectations to become entrenched among households and businesses — a dynamic it described as a central concern for monetary policymakers worldwide.

De Cos told reporters that a recent ceasefire between the United States and Iran, and the reopening of the Strait of Hormuz, represented "good news" that reduced the likelihood of extreme scenarios, though he noted it would likely take time for oil markets to "normalize."

The report also raised concerns about the sustainability of AI-driven investment, warning that supply bottlenecks and intense competition could produce the kind of overinvestment seen in previous boom-and-bust cycles. While AI has bolstered confidence and supported growth through expectations of productivity gains, the BIS said it was simultaneously raising fears about employment and generating structural uncertainty about how economies are likely to function.

De Cos said it would be "unwise" for central banks to be prescriptive at this stage about how they should respond to AI's economic effects.

Financial vulnerabilities formed a third area of concern. The BIS pointed to elevated asset valuations and signs of investor complacency, which it said have left core bond markets more fragile. The financing of the AI boom, it added, looks increasingly reliant on debt and complex funding structures across the supply chain.

On sovereign debt, the report warned that record-high public debt levels — combined with sovereign debt markets increasingly dominated by large, highly leveraged hedge funds — had created what the BIS called "a new sovereign-financial stability nexus."

"The new fiscal-financial stability nexus may mean more frequent and sharper drops in sovereign bond values," said Frank Smets, acting head of the BIS monetary and economic department, adding that such swings could rapidly tighten financial conditions.

De Cos described the BIS's overall message as one of "urgency," emphasizing the need to bring down debt levels in key economies, "because the fact is that today debt is high, and this is financed through non-bank financial intermediaries."

The BIS urged policymakers to prioritize price stability, ensure fiscal sustainability, strengthen oversight beyond the banking sector, and pursue structural reforms.

"Policymakers must act now. Delay will only make the necessary adjustments more costly," de Cos said.

With AI investment accelerating, sovereign debt markets under stress, and inflation expectations showing signs of renewed instability, the BIS report signals that the window for orderly policy adjustment may be narrowing — and that the costs of inaction are rising in tandem.

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