RBA governor grilled over opposition to climate role

The governor of the Reserve Bank of Australia (RBA) Philip Lowe clashed with a lawmaker on Monday over a proposal for the bank to play a bigger part in addressing climate change. Prior to the exchange Lowe acknowledged that extreme weather is impeding the bank’s ability to fight inflation.

The RBA chief was asked during a hearing of the Senate economics committee if he would support using monetary policy to help fund the transition to a low-emission economy. He said this would be a mistake, arguing that the RBA is focused on delivering its existing goals of managing inflation and trying to bring the economy to full employment.

Lowe also stated that the RBA lacks the necessary instruments to play a greater climate role and that its primary task is setting the short-term interest rate.

However, this position was strongly disputed by Nick McKim, a senator from Tasmania, who suggested that existing legislation gives the RBA significant scope to influence where credit is allocated within the economy.

“The laissez faire approach is cooking the planet as we sit here today,” warned McKim, adding that policymakers’ unwillingness to tame markets “has a lot to answer for”.

Greening of collateral framework among recommendations to RBA review

The exchange took place amid a wide-ranging Treasury review into the RBA’s objectives and policies, which has seen calls for the bank’s operations to be made more consistent with Australia’s net-zero push.

A submission to the review by the Centre for Policy Development (CPD) thinktank recommends integrating climate considerations into the RBA’s collateral framework, more advice from the bank on economic responses to climate change, and an explanation from the governor and treasurer as to how the bank will support the net-zero transition.

Both McKim and the CPD advocate updating the central bank’s legislative mandate to consider sustainability, climate risks and opportunities, and the goal of reaching net-zero greenhouse gas emissions. CPD’s submission says such a change would facilitate an “acceleration in practice” on tackling climate concerns.

However, Toby Philips, one of the authors of the CPD paper, said that although a legislative change would be helpful, he believes the RBA already has scope to act based on its existing objectives, particularly its mandate to contribute to price stability.

“Financial markets are not fully pricing in the effects of climate change. It’s going to look like instability, and the RBA the tools to help address that instability,” he told Green Central Banking.

Climate impacts harming price stability – Lowe

In a recent speech the RBA governor acknowledged that extreme weather events linked to climate change are among a number of factors currently hindering the banks’s ability to bring inflation to target. Lowe said flooding, droughts and heatwaves are affecting food production, commodities production, transport and logistics.

“These disruptions affect prices in global markets and it is likely that we will see more of them in the years ahead,” he warned.

Lowe also raised the possibility that Australia will experience higher and more volatile energy prices during the transition from fossil fuels to a renewables-based supply.

An acknowledgement that price stability is affected by climate impacts and the energy transition has prompted some other central banks such as the European Central Bank (ECB) to work towards full incorporation of climate considerations into monetary policy.

RBA performs poorly compared to G20 central banks

Australia placed 15th in the latest Green Central Banking Scorecard, which scores the monetary and financial policies of G20 countries on their progress in supporting the low-carbon transition. Although the authors recognised that prudential regulators have conducted climate scenario analysis and issued climate risk guidance, they gave the RBA a score of zero on its monetary policies, indicating that no significant steps had been taken.

Philips said it was no surprise to see that the RBA had received such a low score.

“Based on the innovation that’s happening around the world in terms of getting monetary policy aligned with the net-zero transition, Australia is not doing a lot of the things other central banks are,” he said.

The ECB, Bank of England, People’s Bank of China and Bank of Japan are among those institutions which have taken steps to align their monetary policy operations with the shift to net zero.

Philips suggested that the “political toxicity” of climate change in Australia may be causing the RBA to behave more cautiously than some of its counterparts. He suspected senior officials may be wary of being criticised for straying too far into “political” decision-making, but said the bank would be able to withstand such attacks.

Following the hearing on Monday, Nick McKim expressed disappointment that Lowe had rejected the idea that the RBA should direct credit to address the climate emergency.

“There is nothing more important to the prosperity and welfare of the people of Australia than a safe and liveable climate,” he said. “Government needs to be directly funding the transition to a low emission economy, and that includes the use of central banks’ balance sheets.”