Climate risk and central banking in Asia: balancing price stability and financial stability

Climate change is increasingly recognized as having material impacts on the economy and inflation. However, its integration into core monetary policy frameworks—such as inflation targeting or policy rate setting—remains limited in scope and depth. Instead, some central banks apply green considerations to peripheral tools such as lending facilities, collateral frameworks, or reserve management, whose impact can be enhanced with clear taxonomies or similar classification systems. Looking ahead, the direct integration of climate factors into monetary policy may become feasible when (a) climate risks have measurable and persistent impacts on inflation and output; (b) reliable data are incorporated into macroeconomic forecasting models, and (c) mandates explicitly allow consideration of such risks. By contrast, financial stability frameworks have been advancing more rapidly, with central banks and financial supervisors embedding climate risks into prudential reviews and conducting climate scenario analysis or stress testing. To promote banks’ further climate actions, encouraging climate-related disclosure including financed emissions and adopting common methodologies is essential.