The effects of cost-push inflation on Austrian banks

To better understand what the current inflationary surge means for financial stability, this study analyzes how cost-push inflation resulting from import price shocks affected key Austrian macroeconomic variables during the current high inflation period (Q2 21 to Q1 23). Broadly in line with the expectable effects of a negative supply shock, the import price shocks are estimated to have caused an 8% rise in Austrian consumer prices, a 1% drop in Austrian GDP and a 180 basis point increase in interest rates following central bank reactions to higher inflation. The effects on Austrian banks’ income statements are more nuanced. On the one hand, the inflationary shocks drove up costs (staff costs and administrative expenses) and banks’ risk provisions; on the other hand, they also caused banks’ income to rise (net interest income and income from fees and commissions). Net interest margins, for instance, are estimated to be 25 basis points (14 basis points) higher for small (large) banks in the period from 2021 to 2023 due to cost-push inflation. The net effects on bank profitability turn out to be heterogenous. For small banks, cost push-inflation drove up costs and risk provisions more than income, causing the return on assets (ROA) to be 35 basis points lower in the period from 2021 to 2023. For large banks, the shocks led to smaller increases in costs and risk provisioning, resulting in a ROA that was 13 basis points higher in the same period.