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Central Bankers’ Green Lines

There is growing evidence that global warming, particularly through its effect on agriculture, may create inflationary pressures, and that the physical and transition risks created by climate change could jeopardize financial stability. So, why is there no consensus among central bankers on how monetary policy should respond?

LONDON – Climate change 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 warming, particularly through its effect on agriculture, may create inflationary pressures. And there is even stronger evidence that the physical and transition risks created by climate change 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 United States. A proactive approach might lead the central bank into a political war zone, vulnerable to attack from both sides.

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