IMF Blog,update

 

Dear MARIA, We just published a new blog—please find the full text below.  Rising Rates May Trigger Financial Instability, Complicating Fight Against Inflation (Credit: Klaas Jan Schraa/iStock by Getty Images) By Katharina Bergant, Mai Hakamada, Divya Kirti, and Rui C. Mano 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.  Our new research on the relationship between inflation and bank profitability helps us make sense of these concerns. 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. As several major central banks are reassessing their monetary policy frameworks in the aftermath of the post-pandemic inflation surge, a deeper understanding of the links between inflation and bank profitability can help design better monetary policy frameworks. Our findings imply that central banks may need to consider financial stability when setting their policy stance to combat inflation.  Inflation matters Does inflation matter for bank profitability? This question has received surprisingly little attention. We answer it by combining balance sheet and income data for more than 6,600 banks in advanced and emerging economies with nearly three decades of IMF economic data. Most lenders appear largely hedged against inflation with both bank income and expenses rising with inflation to similar degrees. Income and expenses tied to borrowing and lending are exposed indirectly to inflation, because they primarily react to policy rates that fluctuate in response to inflation. In contrast, other income and expenses—revenues from non-traditional banking activities, services, salaries, and rent—are exposed directly to price changes. At the country level, the impact of inflation on bank income and expenses individually varies widely across banking systems. Shifts in inflation are reflected in income and expenses much more rapidly in some countries than in others. But, again, since both income and expenses rise with inflation to similar degrees in most countries, most banking systems appear largely hedged to inflation. Concentrated exposures So, can inflation be a cause for concern? Our research identifies specific vulnerabilities: some banks are particularly susceptible to inflation due to different risk management and business models. Outliers in both advanced and emerging market and developing economies stand to see large losses when inflation and interest rates spike. Strikingly, 3 percent of banks in advanced economies and 6 percent of banks in emerging economies are at least as exposed to elevated interest rates as Silicon Valley Bank at the onset of its failure. Banks in emerging economies also appear more exposed to inflation directly, possibly due to more widespread price indexation. Policy implications 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. 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. Despite these improvements, if losses at individual banks leave room for wider contagion, central banks may need to balance raising rates to contain inflation against the potential for financial instability. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org

Dear MARIA, In today's edition, we highlight: Georgieva calls on Arab countries to become more agile, adaptable, and resilient Rising rates may trigger financial instability, complicating fight against inflation Remembering Horst Köhler Okamura on building resilience and boosting growth Are housing markets broken? IMF staff papers, and more

ECONOMIC GROWTH Georgieva Calls on Arab Countries to Become More Agile, Adaptable, and Resilient (Credit: Christophe Viseux/IMF Photo) In a world of rapid transformations, it is critical for Arab countries to become more agile, adaptable, and resilient. They need to look for new engines of growth, which will also help avoid a low-growth, high-debt trap. The Middle East and North Africa region can achieve success by focusing on structural changes that increase economic resilience, agility, and long-term growth potential; economic diversification; and deepening regional cooperation, said IMF Managing Director Kristalina Georgieva in remarks at the Ninth Arab Fiscal Forum in Dubai this week. “The private sector has to be in the lead in transforming economies in the region through entrepreneurship, job creation, and innovation,” said Georgieva. “The role of governments is to foster the right environment for this private sector-led growth: by strengthening governance, modernizing public institutions, reducing bureaucracy, encouraging youth and female employment, and improving access to capital. And by designing and communicating policies that put people first and increase social support.” In opening remarks at the World Government Summit 2025, also held this week in Dubai, Georgieva discussed three priorities for GCC countries in particular to lift their growth potential: raise productivity; enhance the environment for innovation, creativity, and entrepreneurship; and deepen regional economic integration. “By continuing to make progress in these areas, GCC countries can continue to be a bright spot, build resilience, and chart a prosperous course for the future,” Georgieva concluded. Read the Arab Fiscal Forum Speech

INFLATION Rising Rates May Trigger Financial Instability, Complicating Fight Against Inflation (Credit: Klaas Jan Schraa/iStock by Getty Images) 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.  New IMF research on the relationship between inflation and bank profitability helps make sense of these concerns, write the Fund’s Katharina Bergant, Mai Hakamada, Divya Kirti, and Rui C. Mano in a new blog. 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, the authors say. The new findings imply that central banks may need to consider financial stability when setting their policy stance to combat inflation.  Read the Blog

IMF MANAGEMENT Remembering Horst Köhler (Credit: IMF Photo) The IMF is mourning the death of Horst Köhler, the eighth Managing Director of the Fund. Köhler, who served from 2000 to 2004, led a life of distinguished public service, including assuming the presidency of the Federal Republic of Germany in 2004. “Mr. Köhler will be remembered for his many contributions, and in particular for navigating the Fund's work through the difficult period after September 11, 2001,” said IMF Managing Director Kristalina Georgieva in a statement. “He mobilized the Fund and the international community to help the low-income and heavily indebted members, championing greater transparency and strong governance.” Köhler leaves behind “a profound legacy of dedication to fairness and justice and an unfailing concern for others,” Georgieva noted. Read the Statement

EAST ASIA AND PACIFIC Okamura on Building Resilience and Boosting Growth (Credit: Joshua Roberts/IMF Photo) The global economy has remained surprisingly resilient despite the shocks of recent years, but divergences across countries are widening, said IMF Deputy Managing Director Kenji Okamura in remarks at the 7th IMF-JICA Conference in Tokyo. Policymakers will need to be agile and focused on building resilience and lifting growth, which is key to raising living standards and creating jobs, he said. In his speech, Okamura focused on three priorities: implementing reforms to lift productivity; rebuilding fiscal buffers; and strengthening cooperation. “By working together, Asian countries can leverage their collective strengths. In a changing world, this can help buffer against shocks and heightened uncertainty,” Okamura noted. “Among Asian countries, cooperation in the areas of AI, digital connectivity, and cross-border digital payments is moving fast, and could be a big boost to growth.”

FINANCE AND DEVELOPMENT Are Housing Markets Broken? (Credit: iStock/seewhatmitchsee) Few economic issues are as contentious as housing. Concerns about affordability are top of mind for many people, young people especially, as aspirations for homeownership appear increasingly far-fetched. Writing in F&D, IMF economist Hites Ahir asks: Are housing markets broken? The philosopher Thomas Carlyle famously lambasted economists for parroting “demand and supply” as the answer to every question, Ahir writes in the magazine’s Back to Basics series. “But it must be the starting point for any explanation of the seemingly relentless rise in house prices: income and population growth boosts demand for housing and, unless supply keeps up, house prices continue to rise.” Read the Article Subscribe to F&D magazine and receive a free print issue.

Weekly Roundup STAFF PAPER Government Debt and Growth: The Role of R&D Economic growth in advanced economies (AEs) has been slowing since the early 2000s, while government debt ratios have been rising. The recent surge in debt at the onset of the COVID-19 pandemic has further intensified concerns about these phenomena. This new IMF staff paper offers insights into the high-debt low-growth environment in AEs by exploring a causal link from government debt to future growth, specifically through the impact of debt on R&D activities. The findings contribute to the understanding of the relationship between government debt and growth in AEs, given the role of technological progress and innovation in economic growth. STAFF PAPER The Labor Market Decisions of Older Workers in Ageing Economies: Evidence from Spain and the UK Faced with fiscal pressures and labor shortages from ageing populations, advanced economies need to ease obstacles to longer working lives. In this new IMF staff paper, the authors discuss recent developments in employment and activity of workers aged 55 and above in Spain and the UK—two countries that differ widely on historical and recent employment rate patterns as well as institutional settings. Policy priorities to address this issue include improving accessibility for older workers with physical limitations, providing incentives to return to employment for the long-term unemployed, and greater flexibility in hours and working arrangements for those who have family caring duties or want to gradually transition out of work, the authors say.

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FEBRUARY 16, 2025 1:30  AM ET AlUla Conference for Emerging Market Economies The AlUla Conference for Emerging Market Economies is an annual economic policy conference, held in AlUla, Saudi Arabia, organized by the Ministry of Finance of Saudi Arabia and the IMF Regional Office in Riyadh. The conference will convene a select group of emerging markets’ ministers of finance, central bank governors, and policymakers, as well as public and private sector leaders, international institutions, and academia. It will offer a unique platform to exchange views on domestic, regional, and global economic developments and discuss policies and reforms to spur inclusive prosperity and build resilience supported by strong international cooperation. Watch Here

Thank you very much for your interest in the Weekend Read! Be sure to let us know what issues and trends we should have on our radar.

Miriam Van Dyck Editor IMF Weekend Read mvandyck@IMF.org