The Price of Hesitation: How the Climate Crisis Threatens Price Stability and What the ECB Must Do about It

The ability of the European Central Bank (ECB) to control inflation may be significantly undermined if the world passes the 1.5ºC or 2ºC threshold, finds this paper from leading academic and civil society groups.

The authors say that, as a result, actions taken to prevent an increase in global warming therefore have an important role to play in allowing the ECB to achieve its primary objective in the future.

The study  – a collaboration between Greenpeace, the German Institute for Economic Research and the Centre for Sustainable Finance at SOAS, University of London – used regression models were used to estimate how inflation responds to disaster events. The results show increases in headline and core inflation, with price increases being higher for food and beverages – an effect likely to become stronger as global warming increases.

The report sets out how the ECB could develop an ambitious agenda to help deliver on both its primary mandate of maintaining price stability and its secondary mandate of supporting the general economic policies of the European Union.

Recommendations include introducing more explicit climate performance criteria into monetary policy tools and  aligning prudential regulation with climate neutrality. It also proposes abandoning market neutrality as a guiding principle of monetary policy.

The report also calls for double materiality and macrofinancial feedback loops to be incorporated into ECB macroeconomic modelling and scenario analysis, and for more ambitious climate-related criteria in the ECB’s portfolio management.

It concludes with an appeal for bold action and for the ECB to send clear signals to the European financial sector that a net-zero transition of the eurozone economy and the financial system is a key policy target.