The International Monetary Fund (IMF) has said its new research on the relationship between inflation and bank profitability points out that most banks are largely insulated from shifts in inflation—the exposure of income and expenses tend to offset each other.
Yet, it said, some have significant inflation exposures, which may lead to financial instability if concentrated losses lead to wider panics in the banking sector.
The Fund said that as several major central banks are reassessing their monetary policy frameworks in the aftermath of the post-pandemic inflation surge, a deeper understanding of the links between inflation and bank profitability can help design better monetary policy frameworks.
“Our findings imply that central banks may need to consider financial stability when setting their policy stance to combat inflation,” the fund said.
Our new staff research shows banks in emerging and developing economies are more exposed to inflation directly. Strong risk management and regulatory frameworks are vital for financial stability. Read our latest blog. https://t.co/6tdVNX3y6j pic.twitter.com/YaGN77lomw
— IMF (@IMFNews) February 18, 2025
Portions of the research said that amid high inflation, tightening monetary policy, while necessary, could lead to meaningful losses for banks with large exposures. Customers and investors may then reassess risks across all banks, which could lead to panics and financial instability.
“Strengthening prudential regulation and supervision, heightening required risk management at banks, improving transparency, and using granular risk assessments accounting for key factors our research highlights for a broad set of banks would all help to systematically contain inflation exposures,” it said.
Despite these improvements, the IMF said, if losses at individual banks leave room for wider contagion, central banks may need to balance raising rates to contain inflation against the potential for financial instability.
