Monetary policymakers must manage trade-offs arising from the increasing influence of extreme weather events on output and inflation to deliver price stability, according to the Network for Greening the Financial System (NGFS). The advice came in a new report, which aims to provide central banks with a systematic understanding of the implications of physical hazards of climate change for the macroeconomy – including for the conduct of monetary policy. Around three quarters of central banks surveyed by the NGFS said their economies had experienced damages from acute climate events over the last decade. Annual global damages from weather-related hazards have more than doubled in real terms in the past 20 years, reaching US$275 billion in 2022. The NGFS report analysed the economic channels through which the acute physical impacts of climate change can propagate to the economy, setting out an analytical framework to help central banks understand the implications for key macroeconomic variables relevant to monetary policy considerations. “Central banks have typically treated the macroeconomic impacts of extreme weather events as transitory supply shocks, looking through their impact on output and inflation when setting monetary policy,” said James Talbot, Chair of the NGFS Workstream on Monetary Policy. “However, with these events expected to become more frequent and severe around the world, more persistent macroeconomic effects are likely to follow via both domestic and international spillover channels, making them harder for central banks to look through.” The publication is the first in a series of similar documents from the NGFS expected in the coming weeks to support central banks in assessing and understanding the macroeconomic effects of climate change and the transition to net zero.
