The European Central Bank (ECB) will struggle to control inflation if the world passes 1.5ºC of warming, finds a new report from leading academic and civil society groups. As a result, the bank must adjust its policies to maintain price stability and match the urgency of the climate crisis.
The study, from the German Institute for Economic Research, the Centre for Sustainable Finance at SOAS and Greenpeace, is the first to present empirical evidence of the impact of natural disasters on inflation in the eurozone.
Researchers found evidence of a link between natural disasters and increases in headline and core inflation in the Eurozone, which they say will worsen as warming accelerates.
The authors say that, given the ECB’s primary mandate to keep prices stable and its secondary mandate to support European Union economic policies, the central bank has a responsibility to take actions that will help to limit the rise in temperatures.
While the paper welcomes the ECB’s announcement of its new monetary strategy and climate action plan, it calls for more ambitious measures. It recommends that the ECB and the European System of Central Banks should:
- introduce more explicit climate performance criteria into their monetary policy tools;
- align prudential regulation with climate neutrality;
- abandon market neutrality as the key principle guiding the design of monetary policy;
- incorporate double materiality and macrofinancial feedback loops in macroeconomic modelling and scenario analysis;
- use more ambitious climate-related criteria in their portfolio management.
The report adds to criticism from civil society groups that the ECB’s climate action plan fails to incorporate key aspects of the central bank’s operations and will take too long to come into effect.
“The current roadmap is quite weak on actual actions,” said Uuriintuya Batsaikhan, economist at Positive Money Europe, in a review of the new ECB climate strategy.
“Even if there will be disclosures, risk accounting frameworks, data and models they do not entail actual implementation and impact, which are then envisaged for after the strategy review in 2025.”
This page was last updated September 15, 2021
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