Luiz Awazu Pereira da Silva © Marcos Oliveira / Agência Senado
Central banks should seize the opportunity posed by falling inflation to shift to a more flexible system of monetary policy and adjust inflation targets, in order to respond to the supply shocks that climate change will make more likely, said the former deputy general manager of the Bank for International Settlements (BIS).
Luiz Awazu Pereira da Silva, who worked at the BIS from 2015 to 2023 and was previously deputy governor of the Central Bank of Brazil, has published a joint paper calling for central banks to consider the idea of “adaptive” inflation targeting as global warming triggers price spikes, particularly for food.
“Our message here is for the community of central banks to get together and think about this,” Pereira da Silva told Green Central Banking. “It cannot be an isolated central bank because otherwise it’s going to be perceived as opportunistic.”
Adding a tolerance band to inflation targets
Many central banks – including the US Federal Reserve, European Central Bank and the Bank of England – target inflation of 2%, helping to anchor price stability, although the policy has come under question since the pandemic when inflation jumped, exacerbated by the wars in Ukraine and Gaza.
Global warming could add up to 3 percentage points to annual food inflation and up to 1.2 points to headline inflation globally by 2035, according to some projections.
Pereira da Silva, who is a professor and research fellow at various institutions including the Grantham Research Institute in London, said central banks should think about coordinating to adopt a temporary “tolerance band” of about 1% – effectively shifting the inflation target to 3% – in times of supply shocks.
“If you accept the tolerance band of 1% then your monetary policy reaction function doesn’t need to be as severe or as aggressive as under the strict 2%,” he said.
Pereira da Silva said this was a good time for the debate to start in the euro zone given that the ECB is cutting rates as inflation nears 2% and growth flags.
“You don’t do it when you already have inflationary pressure out of control because then it will sound opportunistic. We need to be in a situation where you are [at] 2% or you are very close to your target,” he said. “If you don’t start discussing this and if you don’t do it in a collective way, what do you do next if inflation jumps to 4%? Just tighten interest rates and kill the economy?”
He noted that rate hikes to dampen inflation caused by supply shocks risked exacerbating the climate crisis as they would prevent investment in the energy transition.
And there is also an inequality argument for adaptive inflation targeting, he said. Price rises hurt the poor most, while climate change is set to disproportionately hit poorer households and poorer countries too.
However, central banks would need to explain carefully any shifting of targets to avoid anchoring higher inflation expectations, particularly to financial markets, he added.
“If you play with the target, or if you play with bands, you have to explain this to agents in the economy and particularly financial markets … because of inflation expectations you would need to communicate this is a temporary measure.”
Trade tariffs compound climate inflation pressures
Pereira da Silva contrasted falling inflation in Europe with the US where President Donald Trump’s planned tariffs are expected to push up prices.
He admitted it was not a good time for global collaboration among central banks given Trump’s approach, but he said the Fed will have to deal with a lot of potential supply shocks as a result of his policies.
“The politics of it require a lot of international coordination which is absent and even more so now with the way in which the new Trump administration has been advocating its own policies,” he said.
However, Pereira da Silva said Trump’s policies on tariffs and restricting immigration will compound inflation pressures expected to come from climate change.
He said the topic of green inflation could come up at Cop30 hosted by his home country Brazil in November.
“The transition to net zero requires that you discuss what is the best combination of fiscal and monetary policy so that you can finance the transition and you can also control inflation,” he said.
This page was last updated March 28, 2025
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Emma Thomasson is a British journalist, consultant and trainer based in Berlin. She is an expert in economics, politics, business and technology. She previously worked for Reuters as a correspondent and bureau chief in Germany, Switzerland, the Netherlands, South Africa and the UK.
