Global Banking Sector Suffers Under Inflation Pressure, Say Experts

The global banking sector is experiencing a critical juncture amid rapidly evolving geopolitical developments in the Middle East, which are indirectly but profoundly impacting the stability of financial markets.

Rising oil prices, fueled by concerns surrounding global energy supplies, have become a major factor in exacerbating inflationary pressures and increasing uncertainty.

As these conditions persist, central banks find themselves compelled to maintain tight monetary policies, which in turn impacts the cost of funding and asset quality within the banking sector.

While a full-blown banking crisis is not imminent, the current environment points to a period of risk repricing and a true test of banks’ ability to adapt to a more complex economic reality that is likely to last longer than anticipated.

In this context, financial economic analyst in Kazakhstan’s Nazarbayev University research center Rassul Rysmambetov told Qatar News Agency that the escalation in the Middle East has begun to be clearly reflected in the global banking sector, not directly, but through the energy price channel and its impact on inflation and the volatility of financial markets.

He noted that the rise in Brent crude prices above $110 per barrel, coupled with the risks surrounding the Strait of Hormuz through which approximately 15-20 percent of global oil supplies pass, represents a major pressure factor. He added that any 10 percent supply shock could raise inflation rates by about 0.3 to 0.5 percentage points.

The financial expert stressed that rising inflation expectations are pushing major central banks to maintain tight monetary policies, as the Federal Reserve, the European Central Bank and the Bank of England continue to keep interest rates at high levels, warning that the real danger lies not only in the size of the shock, but in the possibility that it will last longer than the markets expect, which could lead to a loss of control over inflation expectations.

He indicated that rising oil prices quickly translate into higher transportation, energy, and food costs, creating secondary inflationary effects that central banks cannot ignore, thus reducing the likelihood of near-term interest rate cuts. He noted that markets are beginning to shift from a “soft landing with easing” scenario to a “higher interest rates for longer” environment, with rising real yields and a widening term premium.

Regarding the banking sector, Rysmambetov noted that the effects are mixed. On the one hand, large banks with stable funding bases benefit from higher interest rates by boosting net interest margins, but on the other hand, pressures are increasing as a result of higher funding costs and deteriorating asset quality.

He noted that rising living costs, especially fuel, food and services, will negatively affect household income, which could lead to an increase in non-performing loans if the crisis continues.

Despite these challenges, the financial expert stressed that the global banking system is entering this phase from a position of relative strength, based on good capital adequacy ratios, with the average Tier 1 capital ratio (CET1) being around 14.1 percent, along with high liquidity levels and stricter stress testing frameworks.

Therefore, he rules out a full-blown banking crisis, but does not deny the possibility of localized pressures in some of the most affected sectors and regions.

In conclusion, Rassul Rysmambetov said the main risk is not an imminent banking crisis, but a prolonged repricing of risk across the global financial system, which will erode credit quality and test banks’ ability to adapt to an environment of high interest rates, slowing growth, and tighter lending conditions.