Central Banks Urged to Address Climate Risks Without Becoming Climate Policymakers

Central banks should neither ignore climate change nor attempt to act as climate policymakers, according to a new economic analysis examining the appropriate role of monetary authorities in an increasingly climate-affected global economy. The report argues that while governments remain responsible for designing and implementing climate policy, central banks must recognise that climate-related developments have become significant macroeconomic forces capable of influencing inflation, economic growth, financial stability and the effectiveness of monetary policy.

The study stresses that central banks should not become climate activists by pursuing environmental objectives beyond their legal mandates. Instead, their primary responsibility remains safeguarding price stability and, where applicable, supporting financial stability. However, because climate change and the transition to a lower-carbon economy increasingly affect economic conditions, central banks cannot disregard their impact when making monetary policy decisions.

Climate-related risks can influence the economy through multiple channels. Extreme weather events may damage infrastructure, disrupt supply chains and reduce productive capacity, creating inflationary pressures while weakening economic output. At the same time, policies aimed at reducing greenhouse gas emissions—such as carbon pricing, environmental regulation and investment in cleaner technologies—can alter production costs, consumer demand and investment patterns, with important implications for inflation and growth.

The report also highlights the financial dimension of climate change. Physical risks associated with more frequent natural disasters and transition risks arising from changes in regulation, technology or market preferences can affect asset values, lending conditions and financial market stability. These developments may influence credit availability, collateral values and the transmission of monetary policy, making climate considerations increasingly relevant for central banks responsible for maintaining financial stability.

Rather than adopting climate objectives of their own, central banks are encouraged to integrate climate-related risks into their existing analytical frameworks. This includes enhancing macroeconomic forecasting models, incorporating climate scenarios into economic analysis, monitoring how climate developments affect inflation expectations and improving communication about the economic consequences of climate-related shocks. By doing so, monetary authorities can remain focused on their core mandates while ensuring that policy decisions reflect evolving economic realities.

The analysis further argues that predictable and credible government climate policies can help reduce economic volatility during the transition to a lower-carbon economy. Stable policy frameworks enable households, businesses and financial markets to adjust more gradually, reducing uncertainty and making it easier for central banks to maintain price stability without being drawn into broader political debates surrounding climate policy.

Ultimately, the report concludes that the appropriate approach lies between two extremes. Central banks should neither expand their mandates by actively pursuing climate policy nor ignore the growing influence of climate change on macroeconomic and financial conditions. Instead, they should remain focused on their traditional responsibilities while ensuring that climate-related developments are fully incorporated into monetary policy analysis, financial stability assessments and risk management frameworks. Such an approach preserves institutional independence while enabling central banks to respond effectively to one of the defining economic challenges of the coming decades.

By fLEXI tEAM