By Ashiadey Dotse
The International Monetary Fund (IMF) has advised central banks to take financial stability into account when making policies to control inflation.
In a new study, the IMF found that most banks are not severely affected by inflation because their income and expenses balance out. However, some banks have significant exposure to inflation risks, which could lead to financial crises if they suffer heavy losses.
The IMF noted that after the recent inflation surge caused by the COVID-19 pandemic, central banks worldwide are reviewing their monetary policies. A better understanding of the link between inflation and bank profitability, the Fund said, will help shape stronger financial policies.
The report warned that while tightening monetary policy is necessary to fight inflation, it could also cause losses for banks with high exposure. If these losses spread, they could trigger panic in the financial system.
To prevent this, the IMF recommended stronger regulations, better risk management for banks, and greater transparency. It also suggested that central banks strike a balance between raising interest rates to control inflation and avoiding financial instability.
