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As the global recovery continues in the year ahead, the outlook for the banking sector is stable, says Moody’s Investors Service.

The rating agency said the global banking industry’s credit outlook is stable for the next 12 to 18 months based on expectations that the economy will maintain its steady recovery, which should support banks’ asset quality and keep loan losses low.

Moody’s said growth should be strong enough in 2022 to keep unemployment low, which protects the asset quality of the banks.

“Corporate and consumer default rates will likely remain low, and funding conditions will remain accommodative, as we expect central banks will only tighten policy gradually,” said Michael Rohr, senior vice-president with Moody’s.

“Solid capital positions, improved loan loss reserves and sufficient liquidity will protect banks’ credit profiles,” he added.

Moody’s said higher inflation won’t immediately weigh on banks’ profitability.

“In the short run, it could even benefit banks’ asset quality, particularly if borrowers’ nominal income strengthens, reducing the real cost of servicing loans,” it said, adding that it expects inflationary pressures to subside in 2022.

However, if high inflation persists and is met with a sudden rise in interest rates, that “would weigh on asset valuations and push up customer borrowing costs, raising the likelihood of loan delinquencies and elevated provisions.”