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Combating climate change while setting interest rates is now a permanent tension for global monetary officials as they tackle rampant inflation, top central bankers from across the Group of 20 said.
Confronting how green concerns impact their independence, policymakers from Bank of Japan Governor Haruhiko Kuroda to Isabel Schnabel from the European Central Bank acknowledged that there’s no easy solution while sticking to their individual missions of achieving price stability.
“Many central banks globally are responding to current high inflation by tightening financing conditions,” the euro-zone official told a panel Tuesday in Stockholm. “While a higher cost of credit will make the financing of renewable energies and green technologies more expensive, it would be misleading to use higher interest rates as a scapegoat for a further delay in the green transition.”
Central banks are considering ways to help fight climate change without being dragged into political battles that could undermine their independence. Some institutions have ensured asset purchases and holdings are less exposed to industries with high greenhouse-gas emissions, though explicit mandates do limit options for policy makers.
“In the face of the global challenge of climate change, it is important that central banks take action dynamically and flexibly make adjustments,” Kuroda said. “Programs should carefully consider their actions within their mandate in light of individual circumstances.”
Kuroda introduced the BOJ’s first lending program to support efforts to combat climate change in 2021. The amount of outstanding loans for that program stood at 3.6 trillion yen ($27.2 billion) as of July last year.
He spoke on the first panel at a symposium on central bank independence organized by the Riksbank to celebrate former Governor Stefan Ingves, whose 17-year reign setting monetary policy in the biggest Nordic economy came to a close at the end of 2022.
Bank of Canada Governor Tiff Macklem, whose own officials have focused recently on the financial-stability risk stemming from mispricing of assets with climate-related risks, talked of the limits to his own mission.
“We have to stick to our mandates,” he said, while acknowledging also, “we have to talk about the things that are affecting them.”
From the audience, People’s Bank of China chief Yi Gang offered his own view on how the responsibility to act weighs as he sets monetary policy.
“A central bank can do a lot to help the green transition,” he said. “Since China’s emissions is so large, I particularly feel that we have a very heavy task on our shoulder.”
Getting prices under control is what’s preoccupying central bankers most, Schnabel said.
“Some argue that monetary-policy tightening may even be inconsistent with the objective of price stability,” she said. “Does this imply that we should raise our interest rates less forcefully? My answer is clearly no for a simple reason: The green transition can only thrive with price stability.”
Her ECB colleague Pierre Wunsch warned of the risk of raising expectations of what central banks can actually do and muddying their communications in the process.
“People don’t know what a central bank is,” the Belgian official said. “We are increasing this misunderstanding about what our role is and I think the more we’ll say we have to do something in terms of financing the transition or helping financing the transition, the more we are going to be asked to really go and finance the transition and we’ll not be able to do that.”
–With assistance from Kati Pohjanpalo, Toru Fujioka, Erik Hertzberg, Jana Randow and Yuko Takeo.
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