Monetary Policy and Climate Change

Climate change has a significant impact on monetary policy. Changes in atmospheric conditions, climate policies (both adopted and under consultation), and the transition to a low-carbon economy affect prices, economic activity, labour productivity, and other key macroeconomic indicators through multiple transmission channels. In line with their mandate, central banks take these factors into account in order to maintain price stability over the medium term.

Changes in atmospheric conditions affect food prices and, indirectly, energy prices, which are key components of inflation dynamics.

Rising temperatures and long-term shifts in weather patterns impact labour productivity and agricultural output. Extreme weather events can damage infrastructure, accelerate capital depreciation, disrupt supply chains, or create imbalances in labour markets, thereby weighing on economic activity and affecting growth across sectors.

The transition to a low-carbon economy also has important implications for monetary policy. Ongoing discussions on climate policy proposals, such as carbon pricing, may influence inflation expectations by affecting firms’ cost expectations and household price perceptions. The implementation of such measures can lead to significant changes in the price level. At the same time, more complex changes in investment structure or shifts in consumer behaviour could affect output, productivity, and, as a result of temporary imbalances, the price level as well.

Economic and Financial Impacts of Climate Change

Against this background, central banks need to understand the complex interactions between physical and transition risks related to climate change and price stability. This requires incorporating climate-related considerations into macroeconomic analyses, forecasting and monetary policy decision-making in a systematic and forward-looking manner.