Staff Discussion Notes

Inflation and Bank Profits: Monetary Policy Trade-offs

By Katharina Bergant, Mai Hakamada, Divya Kirti, Rui Mano

February 13, 2025

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Katharina Bergant, Mai Hakamada, Divya Kirti, and Rui Mano. "Inflation and Bank Profits: Monetary Policy Trade-offs", Staff Discussion Notes 2025, 001 (2025), accessed March 18, 2025, https://doi.org/10.5089/9798400294723.006

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Disclaimer: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Summary

Given the recent surge in inflation and the resulting sharp monetary tightening, this note asks whether bank profits are exposed to inflation. While most banks tend to match income and expense exposures, 5 and 8 percent of banks in Advanced Economies (AE) and Emerging Market and Developing Economies (EMDE), respectively, are vulnerable to changes in inflation and interest rates due to differences in risk management practices and business structures, with 3 and 6 percent of AE and EMDE banks, respectively, at least as exposed as Silicon Valley Bank at the onset of its failure. If losses at individual banks leave room for wider panics—despite needed improvements in bank regulation and supervision and other ex ante measures—central banks may need to weigh raising rates to contain inflation against the potential for financial instability.

Keywords: Bank profitability, Financial stability, Inflation, Monetary policy

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