The impact of climate change on monetary policy

The challenges of climate change will affect all areas of economic policy, including monetary policy. Rising temperatures, extreme weather events and the political, social and technological responses to climate change may have significant effects on prices, output, productivity or credit markets. Central banks need to reflect these effects in their assessment of risks to price stability, their projections of economic developments and their analyses of financial markets. The mandate of the Eurosystem defines price stability as the primary objective of monetary policy, but it also mentions the support of general EU economic policies, including those aiming at environmental protection. In this contribution, we describe the implications of climate change for price stability, for the future conduct of monetary policy and for central banks’ balance sheets. While monetary policy may play a role among the possible economic policy reactions to climate change, we contrast this role with more effective policy responses. Monetary policy has several instruments at its disposal: changes in the collateral framework, asset purchases and disclosure of climate-related information. Monetary policy implementation is subject to operational constraints, e.g. the principle of market neutrality, which need, however, to be balanced against central bank objectives and must take market inefficiencies into account. Our considerations square well with the ECB’s recently presented action plan to include climate change considerations in its monetary policy strategy.