The climate crisis threatens economic stability – why are central bankers divided?

(The Guardian, 20 Jan 2023) Jerome Powell and Mervyn King reject taking on climate policy, while Mark Carney and Christine Lagarde say action is vital.

The climate crisis has come to represent a major challenge for central banks. How much should their monetary policy and approach to banking supervision be influenced by it?

On one hand, there is growing evidence that global heating, particularly through its effect on agriculture, may create inflationary pressures. And there is even stronger evidence that the physical and transition risks created by the climate crisis are having, and will continue to have, a major impact on the value of financial assets and financial firms, which those responsible for the stability of the financial system cannot ignore.

On the other hand, policies to increase energy costs and lower emissions are hugely controversial, especially in the US. A proactive approach might lead the central bank into a political war zone, vulnerable to attack from both sides.

So far, central banks have tended to see this as territory they cannot avoid. A group of them, principally Europeans, pushed for a new coalition of the willing, and the Network for Greening the Financial System was establishedat the end of 2017. The US Federal Reserve was initially a wallflower but became a full member after Joe Biden’s election. The People’s Bank of China was there from the start, and for a time it seemed that a consensus on central banks’ appropriate posture would emerge.

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The Guardian, 20 Jan 2023: The climate crisis threatens economic stability – why are central bankers divided?