The Bank for International Settlements (BIS) has released its Annual Economic Report 2026, warning that economic progress faces rising perils and that disciplined policy responses across all fronts are now essential. The report identifies four pressure points of direct relevance for banking supervisors. First, inflation risks: in a world of more frequent negative supply shocks — illustrated by the recent closure of the Strait of Hormuz — a key risk is that elevated inflation becomes entrenched if expectations de-anchor, complicating the calibration of monetary policy. Second, the AI boom’s sustainability: while AI-related investment has supported financial conditions and growth expectations, supply bottlenecks and potential over-investment could make the current surge in capital expenditure unsustainable. Importantly, AI financing is increasingly leveraged, with complex interactions within the AI supply chain. Third, financial vulnerabilities: liquidity in core sovereign bond markets may be more fragile than it appears, given stretched valuations and investor complacency. The expanding role of non-banks — particularly highly-leveraged hedge funds — can amplify and accelerate the transmission of market stress, creating what the BIS terms a new “fiscal-financial stability nexus” and mounting challenges for central banks. Fourth, fiscal pressures: near-record public debt and higher interest rates are straining fiscal positions across many economies, leaving governments with reduced capacity to respond to future shocks.
The BIS concludes that safeguarding price stability, ensuring fiscal sustainability, and strengthening financial stability beyond the banking perimeter must be policy priorities — and that discipline in each arm of policy expands the room in which the others can act.
