The world order is evolving. Whether, and how, the international economy remains integrated or shifts into spheres of influence has consequences for central bank policy and reserve management. “We should plan for politicised economic policy, and volatile, supply-limited growth-inflation cycles,” writes Arnab Das, global economic counsellor and macro strategist at Invesco. For reserve managers, this highlights the need for dynamic liquidity and investment tranches.

Geopolitical risks are heightened going into 2025. US foreign policy will shape the trajectory of conflicts, with consequences for oil prices, supply chains and global inflation. Due to possible liquidity shocks and currency instability, officials must prepare for “deployment of reserves through purchasing programmes or interventions” and further balance sheet expansion. Where the central bank assists local banks in meeting their foreign currency positions, “sustained outflows, or a decrease in inflows, will put downward pressure on reserves”. Twenty-four reserve managers reveal their strategies and their views on the sharp rise in the deficits of reserve currency-issuing countries.

In an in-depth analysis of US debt sustainability and central bank balance sheet dynamics, Pablo Guidotti, co-creator of the Guidotti–Greenspan ratio tells Central Banking, “emerging markets have had almost three years of uninterrupted outflows.” For reserves managers with higher interest rates than the US Federal Reserve and growing domestic debt, their risks to reserve adequacy are compounded.

Meanwhile, US debt is projected to rise past 2050 and the proportion held internationally has fallen from half to one-third. After initiating quantitative tightening (QT) and raising interest rates at the same time, the Fed’s unrealised mark-to-market losses exceeded $1 trillion in 2024.

Taking a long-term view on geopolitical alliances, debt, trade and digital cross-border payments, in Foreign policy impact on future FX reserves composition, Central Banking analysis shows renminbi holdings had been steadily growing until Russia’s invasion of Ukraine. The potential role of central bank digital currency in reserve management is beginning to come into focus.

There is a paradox facing the US: The Fed is currently engaging in QT but the federal government continues to run a large deficit. “Consequently, long-term government bond yields could rise as the Fed begins to lower short-term rates.” As well as FX transactions and swap lines, central bank officials explore the interplay of monetary policy and reserve management in this era of uncertainty.