Calls grow for green targeted measures instead of interest rate hikes

November 2, 2022|Written by |Bank of England, European Central Bank, Federal Reserve

As central banks address ongoing inflation by hiking interest rates, a wide range of civil society groups are calling for a more targeted response to the fossil fuel and other supply disruptions behind price increases. They argue that using energy more efficiently and developing renewable supplies is the path out of the energy insecurity and price instability associated with fossil fuels, and they want to see a more discriminating monetary policy that supports these goals.

The day before the European Central Bank (ECB) doubled its key rate to 1.5%, the coalition of six research and advocacy groups wrote to president Christine Lagarde calling for a green lending program. “The solution to the energy – and therefore also inflation – crisis is well-known: we must speed up our energy transition,” they said. Lower rates to finance renewable energy development and energy efficiency would help Europe move away from the insecurity and supply problems associated with fossil fuels, while stabilising energy prices and contributing to the emission reductions needed to avoid catastrophic climate change.

NGO and think tank Reclaim Finance also called for a green lending facility from the ECB. In a statement issued in response to the most recent rate rise, the group warned that “sustained monetary tightening could impair the clean energy transition that is necessary to break with current inflation trends”.

The ECB’s tightening affects inflation by depressing demand, the group said, adding that this has “sizeable socio-economic consequences but only an indirect impact on energy-driven inflation”. They also call for a green lending facility to support investments in renewable energy and efficiency, and protect these crucially important sectors from higher rates and tougher financing conditions.

Sustainable Finance Lab director Rens van Tilburg focused on how higher rates could inhibit investment to reduce fossil fuel dependence and mitigate climate change. He wrote in a recent Euractiv article that higher rates risk derailing investments in renewable energies and building renovations needed to tackle the inflation crisis at its root.”Perversely, this means central banks’ higher rates could also contribute to higher inflation,” Tilburg said.

In the UK, New Economic Foundation analyst Lukasz Krebel makes a similar case in an article for Tribune. “Our inflation is predominantly driven by external factors,” he said, “most notably high gas prices resulting from Covid supply issues and the war in Ukraine.” Higher rates are likely to push the UK economy into recession, he added, without addressing the main underlying causes of rising prices. Instead, Krebel calls for a dual approach in which capital requirements are imposed on fossil fuel lending while green investments are supported by preferential interest rates.

US labour leaders are also questioning rate rises as a response to inflation caused by supply disruptions. “The Federal Reserve is doing the greatest harm I could ever imagine,” said Bill Spriggs, chief economist of the AFL-CIO labour union federation. “I consider what they’re doing right now politics and they are making a political statement about the economy, and they are wrong. Their analysis is flat wrong.”

Carl Rosen, president of the United Electrical, Radio and Machine Workers of America, pointed to supply disruptions in agricultural commodities hit by severe weather events as a source of inflation. Writing in the Chicago Tribune he said that diminished global agricultural production needs to be at the centre of the inflation conversation. “Interest rate hikes will not address the cost-of-living crisis for American workers,” Rosen said. “Rather than throwing our country into a recession with interest rate hikes, our federal government should take other measures to alleviate the pain being felt by working people.”

This page was last updated October 31, 2022

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