Fighting inflation: IMF says central banks may need to consider financial stability when setting policy stance

The IMF’s new research finds that while most banks offset inflation’s impact as income and expense shifts cancel each other out, some banks with significant inflation exposure could face financial instability if concentrated losses trigger wider panics.

As major central banks reassess their monetary policy frameworks after the post-pandemic inflation surge, the study emphasizes the need for a deeper understanding of how inflation affects bank profitability to design better policies.

The findings warn that necessary monetary tightening in a high-inflation environment could lead to meaningful losses for vulnerable banks, prompting customers and investors to reevaluate risks.

To mitigate this, the IMF recommends strengthening prudential regulation and risk management, enhancing transparency, and using detailed risk assessments, so central banks can balance rate hikes with financial stability.