Geopolitical conflicts pose the greatest risk to the global economy, according to central bank reserve managers, despite their generally positive economic outlook.
This finding comes from an annual UBS Asset Management survey of 40 leading central banks, which manage over $15 trillion, about half of the world’s foreign exchange (FX) reserves.
Two-thirds of these banks expect the global economy to achieve moderate growth and inflation in the next five years.
The survey revealed that 71% of respondents foresee U.S. headline consumer inflation ranging between 2% and 3% within a year.
This aligns with the Federal Reserve‘s inflation target of 2%.
However, 87% of the reserve managers identified further escalation in geopolitical conflicts as the main threat to this positive forecast.
Additionally, 41% of them are diversifying their investments across different regions and currencies due to fears of increasing tensions between the U.S. and China.
Gold has become a significant part of this diversification strategy, reaching record high prices.
The survey showed that 24% of respondents increased their gold holdings in the past year, with 30% planning to do so in the coming year.
Bond allocations are also set to rise. Massimiliano Castelli, head of strategy and advice at UBS Asset Management, highlighted the political decision to use profits from Russia’s frozen central bank assets to finance Ukraine, which raises concerns about the safety of FX reserves.
“Gold, historically held by central banks, may regain prominence due to ongoing geopolitical trends,” Castelli stated.
Approximately 260 billion euros ($281.40 billion) of Russian central bank funds are currently frozen, mainly in the EU.
The upcoming U.S. election could further intensify tensions, with 94% of survey respondents predicting that a Donald Trump victory would worsen U.S.-China relations.
Despite these concerns, the U.S. dollar remains the dominant currency in FX reserves.
The survey participants reported an average dollar holding of 55%, consistent with the previous year. Five participants added China’s yuan to their reserves, while two dropped it recently.