The Bank for International Settlements (BIS) has issued a warning that an extended duration of the conflict in Iran could lead to further spikes in interest rates, triggering a sell-off in financial markets and exacerbating widespread damage to the global economy.
The Bank for International Settlements serves as a consultative body for central banks around the world and is responsible for managing foreign exchange reserves for some central banks.
Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic Department at the Bank for International Settlements, stated during a press conference for the latest quarterly report, “If the conflict persists for an extended period, the amplification effects in financial markets could exacerbate the macroeconomic impact.”
He further mentioned, “Rising interest rates could put pressure on the valuation of high-value assets.”
“In light of many countries already facing fiscal strains, the rise in government financing costs and the need to issue more debt could weaken fiscal sustainability,” he added.
The war in Iran has already led to sell-offs in global stock and bond markets. Previously, Iran’s attacks on commercial ships resulted in the actual closure of the Strait of Hormuz (a vital waterway for one-fifth of global oil shipments), leading to a roughly 35% surge in global oil prices.
The Bank for International Settlements stated that due to investor concerns over the high capital expenditures of artificial intelligence (AI) large tech companies and disappointing profit expectations, there has been a selling pressure on major US technology stocks, weighing down on the stock market.
The rise in oil prices has prompted investors to revise their expectations for interest rate cuts by central banks worldwide and may lead some central banks to further raise borrowing costs (hike rates).
Following an analysis of policy statements from 25 monetary institutions covering most global economies, the Bank for International Settlements found that many central banks have moved away from descriptive guidance to presenting forecasts under different scenarios, often including interest rate paths.
Shin noted that, so far, the market “remains orderly, even in those markets most affected by the tense situation,” but the next developments are “worthy of close monitoring.”
“If the conflict continues or escalates beyond expectations, it may induce greater adjustments in inflation expectations and financial conditions,” leading to “pressure on overvalued assets,” he added.
The institution’s Monetary and Economic Department Head, based in Basel, Switzerland, pointed out that as investors vividly remember the runaway consumer price hikes post-pandemic, the market has witnessed “excessive reactions.” He warned that stronger reactions could not be ruled out in the future.
The Bank for International Settlements indicated that higher borrowing costs and a global economic slowdown could intensify tensions in the private credit markets. Currently, investors have begun withdrawing billions of dollars from some of the largest US direct loan fund managers.
Moreover, due to investor concerns about the impact of artificial intelligence on software service providers, those stuck in these relatively less liquid investments have also been withdrawing from listed funds.
BIS stated that funds with higher exposure to software companies underperformed other funds by approximately 5%.
Consequently, this has exacerbated the trend of investors rushing to sell.
“I believe we cannot say the real economy is in a position to pose significant credit risks, but given the concerns around private credit and the illiquidity of these investment tools, this undoubtedly heightens people’s focus on redemptions and accelerates the redemption pace,” said Hyun Song Shin.