Economic Buzz: BIS says central banks face mounting challenges due to near record-high public debt

Bank of International Settlements or BIS has stated in a latest update that central banks face mounting challenges from the interplay of near record-high public debt with the growing role of non-banks in sovereign debt markets. This new fiscal-financial stability nexus amplifies and accelerates the transmission of market stress. More frequent and sharper shifts in sovereign bond values can tighten financial conditions, while inflation expectations may also be disrupted. At the same time, high debt levels complicate monetary policy transmission. Central banks may need to intervene more frequently to address market dysfunction. BIS noted that while central banks have navigated these challenges effectively, lasting success depends on sound fiscal and financial foundations. Public finances must follow a credible, sustainable path. Financial stability risks should be addressed with consistent regulation, and central bank backstops should remain temporary, targeted and reversible.

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