DNB president outlines green monetary policy options

May 20, 2021|Written by Camilla Schramek|De Nederlandsche Bank, European Central Bank

The concept of market neutrality may conflict with the primary and secondary objectives of the European Central Bank’s (ECB) mandate, claimed the Dutch central bank president in a keynote speech about green monetary policy today.

Klaas Knot of De Nederlandsche Bank, presenting a keynote speech at the Centre for European Policy Studies, said the ECB is examining how to reduce the carbon bias in its monetary policy portfolios as part of its ongoing strategy review.

Knot outlined three arguments why central banks in Europe should take climate-related risks into account: price stability; supporting EU economic policy; and the management of climate risk within non-monetary portfolios.

“We know that climate change in itself can cause adverse demand and supply shocks,” Knot said, warning that these shocks can cause higher inflation volatility. He also pointed to carbon pricing and other transition policies as sources of inflation volatility with a direct impact on price stability. “You can easily see that climate change falls within the monetary policy horizon,” he said

Knot also reviewed policy options central banks can use to reduce and manage these climate-related threats. Greater transparency on climate risk is vital, he said, calling for better disclosure of climate-related risk exposure and arguing that “any green monetary policy should be based on a thorough understanding of climate-related risks”.

Central banks could reduce the carbon bias in their monetary operations by proactively adjusting their monetary portfolios towards green assets and away from non-green assets. Knot also suggested they could apply differentiated haircuts in their collateral framework based on climate-related issuer characteristics, and step up their efforts to make their non-monetary portfolios more sustainable.

The ECB is conducting a major strategy review to be published later this year, which will include the bank’s response to climate change. As the president of a Eurozone central bank, Knot is also a voting member of the ECB’s board of governors, the bank’s highest decision-making body.

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