BAKU, Azerbaijan, Sept.22
By Leman Zeynalova – Trend:
The growth in commodity prices changes the customer behavior to spending from saving thus pulling money away from accounts and liquidity away from banks’ assets, Olga Ulyanova Vice President-Senior Credit Officer, Financial Institutions Group, Moody's Investors Service told Trend.
She noted that resulting from this, in order to retain customer funding, banks need to increase deposit rates, but they are not always able to fully translate this shift onto their borrowers via the increased lending rates, because of competition or asset quality considerations.
“Therefore, the second effect of inflation might be shrinking net interest margin. And finally, the most direct implication of a rising inflation is rising operating expenditures, which will suppress banks’ business efficiency,” said Ulyanova.
The analysis published on the European Parliament’s website reads that in August 2021, the inflation rate in the euro jumped to 3 percent, thus exceeding the 2 percent target of the ECB, a situation which had not happened since the second semester of 2018. Yet, the objective does not suppose that inflation should always stand at 2 percent, but that it should be reached over the medium term, as reminded by ECB President Christine Lagarde during the 9 September 2021 press conference following the Governing Council's latest monetary decisions. It is therefore crucial not to focus on a single monthly figure but to analyze price dynamics over several quarters. Inflation has been below 2 percent most of the time since 2012. The question is therefore to assess whether the recent jump is a transitory phenomenon or if it signals a risk of lasting inflation pressure.
The recent upswing of oil prices has mechanically driven headline inflation upward. After a sharp decrease from March 2020 to the end of the year, the energy index has bounced back and, in August 2021, the year-over-year index for energy prices grew by more than 15 percent.
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