Over two-thirds of central banks report climate-related economic damages

In a comprehensive survey on the state of play of climate change and monetary policy, 70% of central banks reported economic damages from acute physical climate events between 2012 and 2022. The survey’s findings also highlight a common desire among central banks to develop their green monetary policy and analytical toolkits.

The Network for the Greening of the Financial System (NGFS) published a report last week which analyses key takeaways from a survey of 55 central banks. The survey was conducted by the NGFS monetary policy workstream and includes a representative sample of central banks from both emerging and advanced economies.

The results show significant progress by central banks in integrating climate concerns into monetary policy. Around 40% indicated they already take climate into account in their operations, while two-thirds plan to do so in future.

There is a “clear consensus” on the need to improve understanding of the macroeconomic effect of climate change as a necessary foundation for monetary policy. More than half of respondents have work underway or plan to assess the economic impact of climate.

Around 70% of central banks cited concerns about the negative economic effects of more widespread acute physical risks, such as droughts and floods, over time. Additionally, 55% expect the transition to have macroeconomic effects within both monetary horizons (two to three years) and longer term horizons.

Ravi Menon, chair of the NGFS and director of the Monetary Authority of Singapore, said: “We are already experiencing the macroeconomic impact of climate change, both its physical and transition effects”. He also noted that effects are “expected to increase over time”.

The report identifies various obstacles to climate-informed macroeconomic analysis, including data gaps, lack of granular data, and a lack of relevant knowledge and expertise.

Although integration of climate into monetary policy is in its “relative infancy” and modelling toolkits need “significant enhancements”, the report stresses that “central banks cannot wait for complete clarity over the path of climate” or for “perfect” macroeconomic models to take action.

The survey’s results will form the basis of the NGFS’s future work and will complement ongoing efforts to address data gaps and develop climate and biodiversity risk related scenarios.

Menon said that “future work will seek to incorporate the implications of climate change into our macroeconomic modelling toolkits and monetary policy frameworks.”

James Talbot, chair of the NGFS monetary policy workstream and director of the international directorate at the Bank of England, said the results show “a desire to deepen our understanding of this issue – leveraging our analytical rigour and diversity – so that policymakers have a coherent analytical framework to draw upon”.

In the report, the NGFS commits itself to building usable toolkits for monetary policymakers, including a common framework for analysing transition-related effects. It also says that, with NGFS support, central banks should improve macroeconomic analysis of climate-related factors and share knowledge around the technical aspects of greening monetary operations.