Inflation: Rising rates may trigger financial instability globally –

Writing in its IMF Blog, analysts from the Fund noted that while banking systems are largely insulated from inflation, vulnerabilities at some banks could lead to tradeoffs between containing inflation and protecting financial stability.

The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) unanimously increased the MOnetary Policy Rate (MPR) by 25 basis points to 27.50 per cent at its November 2024 meeting.

According to the global lender, 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,” it said.

They noted that some banks are particularly susceptible to inflation due to different risk management and business models adding that outliers in both advanced and emerging markets and developing economies stand to see large losses when inflation and interest rates spike.

“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.