Impact of Inflation on Banks’ Performance

Abstract

Abstract. Introduction. Researchers and banking practitioners pay considerable attention to the analysis of the impact of inflation on the banking sector. The statement of the scientists as to the nature of inflation, corresponding to the modern development of the economic processes, is an approach to the origin of inflation based on the imbalance in money supply and demand. Purpose. During 2014-2017, the political and economic crises in Ukraine led to imbalances in the main macroeconomic proportions, which negatively affected the development of the banking system and, as a result, caused rising of the inflation rate, cash outflow, increasing dollarization and declining purchasing power. Inflation processes had a negative impact on the banks’ performance, namely, the rise in inflation reduced lending and interest income and increased interest expenses, what, therefore, reduced banks’ net interest income. Results. While assessing the impact of inflation on the banks’ performance, it was determined that 2019 was a year of the banks’ performance record. According to the statistics, when the inflation rate fell to record low of 4.05%, BSU’s profit in 2019 reached a historic high: solvent banks received UAH 58.36 billion of net profit, which is 2.7 times higher than the previous year historical record. Thus, the implementation of the NBU’s stimulating monetary policy contributes to the achievement of the projected social and economic goals of the society and is an essential factor in ensuring the stability of the banking system, creating the appropriate basis: price stability and low inflation in the long run. Conclusions. According to the results of the analysis, it is possible to state that in 2020 and in the coming years, due to the qualitative monetary policy of the NBU and a decrease in inflation, there is a reason to expect an increase in net profit of the banking system in Ukraine. This positive trend will renew the banking sector in Ukraine, which will lead to its profitability and efficiency. Keywords: inflation, inflation component, inflation targeting, monetary policy, banks’ performance, lending.