The risk of complacency and self-delusion

Article by Mr Luiz Awazu Pereira da Silva, Deputy General Manager of the BIS, and Mr Előd Takáts, Senior Economist, for the Eurofi High Level Seminar 2017, Malta, 5-7 April 2017.

Many years into the crisis, there are finally some consistent signs of a rebound in activity, some reflation and more optimism in markets, with a rise in equities and higher confidence. But the puzzling element is that policy uncertainty is very high while volatility is very low. What's going on? Perhaps the most significant risk for financial markets now is the risk of complacency and self-delusion with positive but only short-term indicators. There seems to be an underestimation of the long-term consequences of political risks in a context of increasing scepticism about trade/financial integration and international cooperation.