Global | How should central banks react to climate change?

Summary

Central banks should not become climate activists. They should treat climate change and mitigation policies as macroeconomic drivers which can affect inflation, output, financial conditions, monetary transmission and, most importantly, inflation expectations.

Key points

• Key points:
• Central banks should not replace governments in climate policy; their role is to assess climate-related effects on inflation, output, financial conditions and monetary transmission.
• Climate shocks can affect the macroeconomy through supply, demand and financial channels.
• Transition policies such as carbon pricing can create short-term trade-offs, but credible and predictable policies help smooth the adjustment.
• The right response is a climate-aware monetary framework: better forecasts, scenario analysis, protection of inflation expectations and clearer communication.

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