The European Central Bank (ECB) may need to revise its monetary policy approach if the green transition proves inflationary, board member Isabel Schnabel has said.
She warned that the higher energy prices the bloc is experiencing could become a persistent feature as its climate policies take effect. She said governments will need to protect the most vulnerable as costs rise, but that the ECB will not be able to “look through” the increases if they threaten price stability.
Central banks have generally opted against a policy response to energy shocks, because such events are usually short lived, and the impact of any response would take too long to have an impact. Schnabel suggested it may be necessary to break with this consensus.
“Monetary policy, for its part, cannot afford to look through energy price increases if they pose a risk to medium-term price stability,” she said.
“This could be the case if prospects of persistently rising energy prices contribute to a deanchoring of inflation expectations, or if underlying price pressures threaten to lift inflation above our 2% target as rising carbon prices and the associated shifts in economic activity boost rather than suppress growth, employment and aggregate demand over the medium term.”
Schnabel praised the European Commission’s proposal for a Social Climate Fund, citing it as a good example of an initiative that would help limit the social impact of higher prices without backtracking on governments’ commitments to reduce emissions. The fund has been put forward in response to the proposed broadening of the scope of the EU’s emissions trading scheme.
While Schnabel’s speech concentrated on the monetary effects of energy shocks and the green transition, a working paper by the ECB last year warned of the increasing impact of extreme weather events. It said that as the frequency of such events increases, the euro area economy will be subject to greater volatility in output and prices, potentially resulting in the effective lower bound interest rate being hit more often.
It also recommended a series of measures the ECB could take to use monetary policy in support of climate change mitigation, including disclosing the climate risk on its balance sheet, and greening its targeted refinancing operations.
This page was last updated January 11, 2022
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