An era of climate-driven extreme weather will force governments to keep interest rates low and usher in a new era of monetary policy, the world’s oldest central bank, Sweden’s Riksbank, warned last week.
“If climate change increases the risk of catastrophe, makes economic developments more uncertain, and worsens growth prospects, it may lead to a lower long-term real interest rate,” leaving government economic planners less flexibility to set policies, the Riksbank said in its annual release monetary policy.
The bank has been working to incorporate climate analysis in its monetary policy decisions since 2019, Bloomberg Green reports. “That includes dumping bonds from issuers with an outsized carbon footprint from its foreign currency reserve,” including Alberta Government bonds in 2019. As well, “in its quantitative easing program, the Riksbank has avoided bonds from companies that fail to meet environmental criteria.”
But now, central banks are looking to “unconventional tools” to confront climate change, as well as globalization and an aging population, Bloomberg says, with the U.S. Federal Reserve and European Central Bank (ECB) President Christine Lagarde declaring climate a priority.
“Central banks clearly need to play their part in the joint global efforts to curb climate change as an urgent and universal challenge,” wrote ECB board member Frank Elderson and Sabine Mauderer, an executive at Germany’s Bundesbank, in a report published last week by the Network for Greening the Financial System. “While we cannot take on the tasks of governments, we also cannot be mere bystanders in the transition to a net-zero economy.”