Climate change and central banks: what role for monetary policy?

Climate change has profound effects not only on societies and economies, but also for the ability of central banks to deliver price stability in the future. Among others, climate change impacts the monetary transmission mechanism, the policy space available to central banks, and has implications for the design of the monetary policy framework. Thus, taking no action is not a viable option, even for central banks without an explicit sustainability mandate. This article establishes a framework for the integration of climate change objectives into monetary policy in the context of the existing central bank mandates. Currently, only in a few cases do such mandates refer explicitly to sustainable growth and development as a policy objective for the central bank. The article discusses several possible ways central banks can respond to climate change, ranging from protective actions to more proactive measures aimed at mitigating climate change by supporting green finance and the transition to a low carbon economy. It also focuses on understanding the constraints and opportunities for action in this arena. Key policy insights Increasingly, central banks are being called upon to support an orderly transition to a low-carbon economy, not only in their financial stability capacity, but also with monetary policy measures. Independently of their specific mandate, central banks should consider protective and awareness raising actions, to ensure resilience vis-a-vis emerging climate-related risks and to safeguard the continued smooth conduct of monetary policy. Subject to their mandates, central banks should also consider designing monetary operations with green features to proactively support the environmental goals of their respective government. While proactive measures have the potential to be more impactful, they are also more controversial unless the central bank has a clear mandate to act on climate.