BoE will hold firm with climate plan, says Bailey

June 1, 2023|Written by Scott Speer|Bank of England

Bank of England (BoE) governor Andrew Bailey has pledged to continue the work of climate-risk assessments, despite criticism that the bank has been distracted from its mandate to maintain low inflation.

Bailey argued that the central bank has an important role in helping to protect the financial system from climate risks. Speaking at the Net Zero Delivery Summit in London on 24 May, Bailey acknowledged that challenges posed by supply shocks during the transition from the Covid crisis complicated addressing climate risks, but stressed the importance of taking immediate action to address that risk, highlighting events like the summit as pivotal.

Bailey underscored that the “economy and financial system are not immune from playing their part” in the net-zero transition.

The BoE’s mandate was updated in 2021 to bring its operations in line with the UK government’s net-zero carbon strategy. However, according to Bloomberg critics have warned of the potential consequences of burdening the central bank with too many objectives, and compromising its focus on inflation control.

Former chief economist John Vickers suggested that while the BoE’s involvement in promoting green initiatives may enhance its environmental credentials, it could undermine its reputation for prioritising inflation control. Former deputy governor Paul Tucker echoed these concerns, stating that the central bank’s involvement in matters beyond its core mission risks detracting from its primary objective.

Former MPs George Osborne and Ed Balls ,who were previously chancellor and shadow chancellor respectively, have also piled pressure on the net-zero policy. They both testified to the House of Lords that climate policies are distracting from the mandate of inflation.

Food inflation in the UK was 19.1% in March, the second-highest among G7 countries. Speaking to British MPs at a question-and-answer session in parliament on 23 May, Bailey conceded that the bank should have picked up on food prices, admitting there are “very big lessons to learn” after failing to forecast the scale of inflation. He insisted that even with hindsight, the BoE would have been forced into raising interest rates well into double digits in order to keep inflation to around 2%.

This latest speech by Bailey succeeds the BoE’s latest climate-related risk report and an announcement that the BoE will reduce spending on climate-related research. It is still unclear whether cuts will affect the BoE’s updated mandate to transition to net zero.

This page was last updated June 1, 2023

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