Rising Rates May Trigger Financial Instability, Complicating Fight Against Inflation

2025-02-14 09:02:00 ET

Summary

• Our findings imply that central banks may need to consider financial stability when setting their policy stance to combat inflation.
• Our research identifies specific vulnerabilities: some banks are particularly susceptible to inflation due to different risk management and business models.
• 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.

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....

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