IMF weighs in on Thai economy

reader · 2025-02-21T05:36:55Z

From International Monetary Fund

Rising Rates May Trigger Financial Instability

Before the pandemic, investors worried about how persistently low inflation and interest rates would crimp bank profits. Paradoxically, they also worried about bank profitability when post-COVID reopening sent inflation and central bank interest rates soaring. The failure of Silicon Valley Bank and other US lenders in early 2023 appeared to validate these fears.

Our new research on the relationship between inflation and bank profitability helps us make sense of these concerns. Most banks are largely insulated from shifts in inflation—the exposure of income and expenses tend to offset each other. Yet some have significant inflation exposures, which may lead to financial instability if concentrated losses lead to wider panics in the banking sector. 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.

Does inflation matter for bank profitability? This question has received surprisingly little attention. We answer it by combining balance sheet and income data for more than 6,600 banks in advanced and emerging economies with nearly three decades of IMF economic data.

Continues at

https://www.imf.org/en/Blogs/Articles/2025/02/13/rising-rates-may-trigger-financial-instability-complicating-fight-against-inflation