Global economic outlook, financial stability risks, stablecoins and central bank independence

Interview with Mr Pablo Hernández de Cos, General Manager of the BIS, with Japan's The Nikkei (in Japanese) and Nikkei Asia (in English), conducted by Mr Mikio Sugeno, Mr Setsuo Otsuka and Mr Takero Minami, Tokyo, 20 April 2026.

Q: How do you view the impact of the escalating tensions in the Middle East on the global economy?

The global economy was doing relatively well until the start of the war in the Middle East, but this scenario has changed. The war has disrupted the supply of crude oil and natural gas and, as such, it is expected to drive inflation upwards and growth downwards. The scale of these effects will largely depend on the duration of the conflict and the extent of the damage to energy infrastructure.

Q: How can we avoid a repeat of the 1970s oil shock?

Let me begin by highlighting an important distinction from the 1970s. Today, central banks enjoy strong credibility, supported by robust monetary policy frameworks and their decisive response to the post-pandemic inflation surge. In this context, the textbook policy response to a temporary negative supply shock is for central banks to "look through" it, if the shock does not destabilise inflation expectations or trigger harmful second-round effects.

That said, if it persists, the "look through" approach would become less suitable. Additionally, the memory of the post-pandemic inflation spike may heighten sensitivity among firms and households to price dynamics, potentially increasing the risk of second-round effects.

Central banks must carefully monitor these developments and be ready to act if needed.

Q: Specifically, what should central banks be watching for?

Central banks should pay particular attention to inflation expectations. If they start to drift up, this is a critical sign that monetary policy tightening could be warranted.

Monitoring the reaction of fiscal policy is also important. If fiscal support is targeted and temporary, it is unlikely to fuel inflationary pressures. However, if fiscal stimulus becomes broader and more persistent, inflationary risks increase considerably, making central banks' work much more difficult.

Q: In Japan, while the Sanae Takaishi administration advocates "responsible expansionary fiscal policy" despite elevated levels of government debt, the Bank of Japan is working to normalise monetary policy. How can we tackle this difficult situation?

It is not my role to comment on the specific policies of individual countries, so allow me to address this more broadly. Countries that are net energy importers are experiencing a significant adverse shock, commonly referred to by economists as a negative terms-of-trade shock. In essence, the cost of products and inputs that we consume and use to produce goods has risen, resulting in a real income loss. In the short run, authorities can only redistribute the loss by, for example, alleviating the impact on vulnerable, low-income households.

If fiscal policy becomes instead too expansionary, inflationary risks increase considerably, possibly compelling central banks to raise interest rates, which would, in turn, dampen economic growth. Let me also underscore the risk that broad-based support may endanger fiscal sustainability, given that public debt levels are at record-high levels in many countries.

Q: Is there a risk of a chain reaction between a downturn in the global economy and turmoil in financial markets?

Prolonged disruptions in energy markets could have profound repercussions on the global economy and, in turn, pose severe risks to financial stability.

At the BIS, we have emphasised the growing fragilities in sovereign debt markets. During the last 15 years, public debt has markedly increased across the globe and has increasingly been intermediated by non-bank financial institutions (NBFIs), including highly leveraged hedge funds. In recent weeks, market sentiment has 

been buoyant, driven by optimism regarding AI developments and the expectations of a rapid resolution to the conflict in the Middle East. If these expectations prove wrong, I can easily see the potential for abrupt market corrections.

Q: How seriously do you view the risks surrounding private credit?

Private credit is an example of the recent significant growth in the role of NBFIs. The volume of private credit is relatively low compared to the global financial system. But it has increased very rapidly, especially in the US, and to a lesser extent in Europe. And it is very opaque, making it difficult to know if assets are valued accurately. We also need to carefully monitor its linkages with the rest of the financial system, including insurance and banks.

Q: Are any particular sectors of concern?

We are closely monitoring the AI sector. At the initial stages, AI development was primarily financed internally, via equity. More recently, AI investment has ballooned in size and become increasingly dependent on external financing, often provided by private credit firms. One key concern about the AI sector is the high degree of interconnectedness of companies in the supply chain. If there is an issue in one important player, this can have reverberations throughout the entire sector.

Q: Isn't there a need for banking regulatory reform in response to changing circumstances?

The regulatory reforms since the Global Financial crisis have played a critical role in strengthening the resilience of the banking sector. Their effectiveness has been demonstrated by the sector's ability to withstand major shocks, including the COVID-19 pandemic, the subsequent sharp tightening in monetary policy conditions, and more recently the disruptions caused by trade tensions and the closure of the Strait of Hormuz.

Preserving the resilience of the banking sector remains as critical as ever. However, nearly two decades after the Global Financial Crisis, it is timely to assess these reforms and explore opportunities to improve the regulatory framework. For instance, there is room to simplify certain rules and to better leverage technology in bank supervision.

As we undertake this process, it is essential to proceed cautiously to ensure that regulatory standards are not diluted, thereby safeguarding the hard-won resilience of the banking sector.

Q: Could it be that, precisely because post-financial crisis financial reforms were successful, risk capital has shifted away from banks?

It is indeed possible that bank regulation may have created incentives for a shift of riskier activities to NBFIs. On this point, I would like to emphasise two key considerations.

First, the shift of risks outside the banking sector can, to some extent, be seen as a natural outcome of the regulatory reforms. These reforms were not designed to eliminate all forms of risky financing but more narrowly to ensure that such activities did not sit on banks' balance sheets. If investors outside the banking system have the willingness and capacity to provide risky financing, this can be a welcome development.

Second, if certain risks taken on by NBFIs are deemed excessive, efforts should focus on developing and implementing congruent regulation for NBFIs to address specific vulnerabilities and ensure the resilience of the financial system as a whole.

Q: The adoption of stablecoins is gaining momentum. How do you view their potential and challenges?

Stablecoins leverage the benefits of tokenisation. This technology can lead to faster and cheaper cross-border payments and harness the benefits of programmability and atomic settlements.

At the same time, stablecoins present significant challenges. One major issue is that, since stablecoins are not settled in central bank money, they cannot ensure convertibility at par with their currency, particularly during times of financial stress or crisis. Additionally, stablecoins pose serious risks to the integrity of financial transactions because they operate on public, permissionless distributed ledger technology (DLT) networks, which can be accessed by anonymous actors. This creates opportunities for illicit activities, tax evasion, and the circumvention of capital controls and foreign exchange regulations. Furthermore, if stablecoins become widely adopted, they could lead to significant macroeconomic challenges, including for credit provision and monetary policy.

Q: How do you view the relationship with Central Bank Digital Currency (CBDC)?

Different jurisdictions are exploring alternative approaches to modernise their payment infrastructures. At the BIS, we have explored the potential to integrate tokenisation into the current two-tier financial system comprising central banks and commercial banks. We see great promise in unified ledgers- public-private platforms which would bring together tokenised central bank reserves, commercial bank money and financial assets. This could improve efficiency while also guaranteeing integrity and stability.

Q: While the eurozone is rushing to issue CBDCs, the U.S. is promoting the spread of private dollar-backed stablecoins through new legislation and is also moving to ban the issuance of CBDCs. It is concerning that these two major economic blocs are moving in opposite directions.

The emergence of new technologies has naturally led public sectors and private firms across various jurisdictions to explore and innovate in different directions. However, it is crucial to ensure that these developments do not result in fragmentation within the global payment system or regulatory frameworks. In line with the BIS's mandate, we remain committed to fostering multilateral cooperation and promoting the adoption of policy frameworks that serve the interests of the global community as a whole.

Q: In January of this year, you signed a statement expressing solidarity with Federal Reserve Chair Powell, who conflicted with the U.S. Department of Justice. Please tell us why.

I signed it in my personal capacity to emphasise the vital importance of central bank independence. A key lesson from recent decades is that central bank independence has been essential for maintaining price stability and citizens' well-being and enhancing macroeconomic resilience. There are numerous examples where the erosion of this independence has led to higher inflation and lower economic growth, with severe consequences for citizens.

That said, independence must go hand in hand with accountability. Central banks must operate strictly within their mandates and ensure that their decisions are transparent and based on rigorous economic analysis.

Q: Given your career, which includes serving as Governor of the Bank of Spain and as a member of the ECB Governing Council, your name has reported in the media as a potential successor to ECB President.

I will not comment. My current focus is on finalising a new strategy for the BIS to ensure the institution can adequately support the central bank community in their pursuit of macroeconomic and financial stability. These are exciting times, given the profound challenges – as well as opportunities – posed by the complex global environment and the emergence of new technologies.