European Central Bank official says climate change should factor into monetary policy

European Central Bank official says climate change should factor into monetary policy
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European Central Bank policymaker Francois Villeroy de Galhau urged Thursday for central banks to consider risks from climate change when setting monetary policy, according to Reuters

While central banks have thus far focused on climate change’s risks as they relate to big investors’ liabilities, Villeroy, also the governor of the French central bank, said a more serious approach must be taken toward the effects of climate change.

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“It is also part of our mandate for monetary policy because climate change affects price evolutions, effects the economic outlook,” Villeroy said at French asset manager Amundi’s annual investment forum in Paris.

“If you look at the economic effect of climate change, it’s probably in the long run a stagflationary shock with higher prices and lower economic output. This is one of the most difficult shocks we central bankers have to deal with.”

Villeroy suggested that central banks should incorporate climate change in the economic models they use to craft monetary policy and should publicize their forecast horizons.

He also called for central banks to take the extra step of considering climate risks when evaluating the financial hazards of collateral that banks post with them to obtain cash, saying such a move would be “a very powerful change of our monetary policy.” 

Villeroy, Mark Carney, governor of the Bank of England, and Frank Elderson, chair of the Network for Greening the Financial Services, released an open letter in April calling on the financial sector to take a more active role in tackling climate change. 

“The prime responsibility for climate policy will continue to sit with governments. And the private sector will determine the success of the adjustment. But as financial policymakers and prudential supervisors, we cannot ignore the obvious risks before our eyes,” they wrote.