When it comes to global financial stability, the picture is mixed: short-term risks are limited, but medium-term concerns remain. The good news is that near-term financial risks are contained.
The reason is that the global economy is increasingly on track for a soft landing. With inflation easing, major central banks have begun cutting interest rates, which has helped lift asset prices and kept market volatility relatively low.
However, the latest Global Financial Stability Report urges policymakers to stay cautious about medium-term risks. Two main areas of concern stand out.
1. Rising vulnerabilities from accommodative financial conditions
Low interest rates and easy financial conditions have encouraged higher asset valuations worldwide, increased government and private-sector debt, and more leverage in financial institutions. While these factors help growth in the short term, they could amplify shocks in the future. History, such as the lead-up to the 2008 financial crisis, shows that these vulnerabilities build gradually, giving policymakers some time to respond—but they still require careful monitoring.
2. Disconnect between geopolitical risks and market volatility
Even as geopolitical tensions rise, financial market volatility remains relatively muted. This gap suggests asset prices may not fully reflect the potential impact of conflicts or trade disputes. If tensions spike, sudden market sell-offs could occur, forcing some financial institutions to quickly sell assets or deleverage. While these steps protect individual firms, they can worsen overall market declines.
In short, while the near-term financial outlook is stable, medium-term risks—especially rising vulnerabilities and misaligned perceptions of geopolitical threats—require vigilance to prevent surprises in the markets.
