An escalation of protectionist measures could spark a fresh downturn just as the global economy is picking itself up after the last one, the international body that represents the world’s central banks has warned.

The Bank for International Settlements (BIS) said there were already signs that “the ratcheting up of rhetoric” was weighing on investment. It comes as Donald Trump steps up hostility with some of the US’s key trading partners and allies, raising fears of a full-blown trade war.

What began with tariffs imposed on steel and aluminium imported into the US has turned into a broader trade battle with trading partners including China and the EU, as they respond with retaliatory measures.

The US president is threatening Beijing with tariffs on $200bn of goods imported from China and on Friday Trump threatened to impose tariffs on European cars after Brussels introduced levies on American goods such as Levi’s jeans, bourbon whiskey and Harley-Davidson motorbikes.

Agustín Carstens, the general manager of BIS, said an increase in protectionist measures was a key vulnerability in the global economy that threatened to undermine growth and could spread to financial markets.

“One possible trigger of an economic slowdown or downturn could be an escalation of protectionist measures. Its impact could be very significant, if such escalation was seen as threatening the open multilateral trading system.

“Indeed, there are signs that the rise in uncertainty associated with the first protectionist steps and the ratcheting up of rhetoric have already been inhibiting investment.”

In its annual report on the challenges facing the global economy, BIS said that the ultra-low interest rates implemented by central banks as an emergency response to the financial crisis had served the global economy well but said loose monetary policy was posing a threat to stability.

“Ten years after the start of the global crisis, central bankers should feel satisfied with the state of the global economy, after expansionary and unconventional monetary policies were left to bear the burden of recovery,” Carstens said.

“But this has left a legacy of higher debts on public and private balance sheets. Still reliant on central bank support and with less room for manoeuvre. Central banks cannot continue be the only game in town.”

Carstens said normalisation of monetary policy – raising rates and unwinding other measures such as quantitative easing – was essential “to rebuild policy space”.

The process has begun in the US, with the Federal Reserve raising rates earlier this month for a second time this year and signalling more increases will follow in 2018.

The European Central Bank has also announced plans to phase out its bond-buying programme by the end of the year after propping up the eurozone economy for the past three years.

On Thursday, the prospect of a rate rise in August strengthened when the Bank of England’s chief economist, Andy Haldane, joined two other members of the monetary policy committee voting for an immediate increase in borrowing costs.

Carstens said BIS was satisfied with the way the Fed and the ECB were communicating their plans, giving markets plenty of warning.

He added: “With this normalisation process, we expect that more volatility will be in the markets but its should be kept relatively under control.”

BIS said governments should also play their part in the recovery by keeping public finances under control and not overspending.

“[Governments] must ensure the sustainability of public sector finances and avoid procyclical fiscal expansions. The importance of this issue cannot be emphasised enough.”

It warned that in some countries the banking system was still not fully healed after the financial crisis, creating vulnerabilities in some economies.