Climate change will affect EU monetary policy ‘one way or the other’, ECB says

(EurActiv, 9 Nov 2018) Whether humankind fails or succeeds in keeping the rise in global temperatures within manageable levels, central banks will sooner or later be called upon to act, said Benoît Cœuré, a member of the European Central Bank’s (ECB) Executive Board.

“Climate change is not a theory. It is a fact,” Cœuré said in a landmark speech in Berlin on Thursday (8 November).

And “it can be expected to affect monetary policy one way or the other,” he told delegates at a green finance conference organised by the Deutsche Bundesbank and the Council on Economic Policies.

In any event, “the consequences in macroeconomic terms look set to be large,” he warned. If left unchecked, climate change “may further complicate the correct identification of shocks” such as floods, storms, and other extreme weather events, which have an impact on inflation.

“Droughts and heatwaves often lead to crop shortfalls, putting upward pressure on food prices,” Cœuré said, while “hurricanes and floods destroy production capacity, thereby raising input and output prices”.

Climate change will also make some areas of the world less inhabitable, causing migration that will impact wage growth and inflation in host countries, like Germany experienced in recent years, he said.

And “in the more desirable scenario in which humankind rises to the climate change challenge, the implications for monetary policy could be equally far-reaching,” he warned – “in particular if the associated shift in the energy mix changes relative prices to an extent that risks destabilising medium-term inflation expectations.”

For instance, “a faster transition towards renewables, coupled with technological breakthroughs” such as artificial intelligence and autonomous driving could depress inflation to the point where it causes “a downward spiral in prices and wages,” he said.

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EurActiv, 9 Nov 2018: Climate change will affect EU monetary policy ‘one way or the other’, ECB says