According to an annual survey released on Thursday, central bank reserve managers consider an escalation in geopolitical conflicts as the primary risk to the global economy, despite their generally optimistic view on the world's economic prospects.

The UBS Asset Management survey, which covered 40 major central banks managing over $15 trillion, approximately half of the world's foreign exchange reserves, revealed that two-thirds of the respondents anticipate a return to moderate growth and inflation within the next five years. The survey also found that 71% expect U.S. headline consumer inflation to remain between 2% and 3% in a year's time, aligning with the Federal Reserve's 2% inflation target.

However, 87% of the reserve managers identified further escalations in geopolitical conflicts as the biggest threat to this favorable scenario. In response, 41% are increasing their regional and currency diversification efforts, particularly due to concerns over rising tensions between the U.S. and China. Gold has particularly benefited from this diversification strategy, with its price reaching record highs. Among the survey respondents, 24% increased their gold holdings in the past year, and 30% plan to do so in the coming year, alongside plans to increase bond allocations.

Massimiliano Castelli, head of strategy and advice at UBS Asset Management, noted, "The recent political decision to use profits from Russia’s frozen assets to finance Ukraine raises further the risk that FX reserves are no longer seen as a safe haven for central banks." He added, "Gold, an asset held by central banks largely for historical reasons linked to the time when it was a pillar of the global financial system, risks being brought back to life by ongoing geopolitical trends."

Globally, approximately 260 billion euros ($281.40 billion) of Russian central bank funds are frozen, mostly in the EU. The upcoming U.S. election could exacerbate tensions, with 94% of survey respondents believing that a victory for Donald Trump would worsen U.S.-China relations. Despite this, the U.S. dollar's dominant role in foreign exchange reserves remains unaffected, with survey participants reporting an average share of dollar holdings at 55%, unchanged from the previous year. Additionally, five participants introduced China's yuan as a new currency in their reserves, while two institutions recently dropped it.