Climate change may force interest rates down, says Riksbank

March 24, 2021|Written by Hilal Atici|Riksbank

Climate change may force central banks to keep interest rates low, Sweden’s Riksbank warned in its annual account of monetary policy released on Wednesday.

“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,” the account said. “One consequence of this could be that the policy rate is more often at its lower bound and the monetary policy room for maneuver is thus limited.”

The Riksbank, the world’s oldest central bank, examined climate change along with wage formation, macroprudential policy and communication challenges surrounding the 2% inflation target in a wide-ranging look at the future of monetary policy.

Highlighting the importance of maintaining confidence in the inflation target while also maintaining the monetary policy room for manoeuvre, the bank said that the effects of climate change on the economy and on monetary policy will become increasingly relevant in the years ahead.

Emphasising the important role of the financial markets in the management of climate risk, the Riksbank warned that climate risks can affect how it manages its core tasks of maintaining financial and price stability.

The value of banks’ collateral may shrink as climate-related catastrophes and loan losses rise. “This can reduce bank’s capital, diminish their liquidity and thereby weaken the banking system’s potential to supply credit,” the review warns. “If the financial system is weakened, it may also become more difficult for monetary policy to make an impact.”

In December 2020, the Riksbank executive board adopted a sustainability strategy for the bank that includes climate and ecological aspects, excluding bonds from high-emission issuers from its foreign currency reserves.

Riksbank also led European central banks by incorporating global heating into its monetary policy decisions and has screened its quantitative easing asset purchases using environmental criteria since 1 January 2021.

This page was last updated July 9, 2024

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