ECB could consider dual interest rates, Schnabel says

January 19, 2024|Written by Moriah Costa|Banque de France, European Central Bank

The European Central Bank (ECB) could consider dual interest rates for green lending, as climate advocates have renewed calls for the central bank to implement different rates to encourage renewable energy projects.

In a Q&A session on X (formerly Twitter) in early January, ECB executive board member Isabel Schnabel said the central bank should “intensify efforts to green our lending operations”, which could include measures like dual interest rates.

“First steps are already being taken. Green targeted lending operations could be considered when monetary policy needs to become expansionary again,” she wrote on X.

In answer to a question about what a neutral rate would look like, Schenabel said such estimates are “uncertain” as the neutral rate may need to be higher than it was before the pandemic due to the green transition and a need for more investment.

Interest in dual rates resurfaced after French president Emmanuel Macron endorsed the idea at Cop28 in December, saying it was “absurd” that there are few incentives for green financing.

On Wednesday, Francois Villeroy de Galhau, governor of Banque de France, indicated that he “wouldn’t say no” when questioned by French senators about the idea of dual rates. However, he added that “we might be talking about more of a subsidy”.

The concept of dual interest rates as a central bank policy is not new. During the Covid-19 pandemic, the ECB created a dual interest rate system with its targeted longer-term refinancing operations (TLTRO) programme which gave a lower rate to banks that lent to the real economy. However, a recent study found that there was a carbon bias in the programme which resulted in increased lending to high carbon-emitting sectors.

The idea of green dual interest rates has “been on the ECB’s radar for a while”, said Lydia Prieg, head of economics at the New Economics Foundation.

It’s likely that the ECB would first roll out a pilot program, as there are “teething problems that are being worked out with regards to the green taxonomy that the EU has”.

Prieg is hopeful that the ECB could move towards a dual interest rate environment sometime this year, possibly as soon as the summer, as the central bank “gets into a position where it will be under pressure to start cutting rates”.

This page was last updated January 19, 2024

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