A Hotter Planet Has Sweden Predicting a New Monetary Policy Era

Global warming may force central banks to keep interest rates low.

Sweden’s Riksbank, the world’s oldest central bank, warned on Wednesday that rising temperatures mean monetary policy can’t ignore the fallout of carbon emissions.

“If climate change increases the risk of catastrophe, makes economic developments more uncertain and worsens growth prospects, it may lead to a lower long-term real interest rate,” the Riksbank said in its annual account of monetary policy. “One consequence of this could be that the policy rate is more often at its lower bound and the monetary policy room for maneuver is thus limited.”

The Swedish central bank has already argued that the global guardians of monetary policy need to re-examine their toolboxes to make sure they’re fit for purpose in a world dominated by financial behemoths and technological innovation. But the Riksbank has also made a point of putting climate change at the center of much of its more recent work.

Since late 2019, the Riksbank has taken steps toward incorporating global warming in its monetary policy decisions. That includes dumping bonds from issuers with an outsized carbon footprint from its foreign currency reserve. In its quantitative easing program, the Riksbank has avoided bonds from companies that fail to meet environmental criteria.

With globalization and population aging pushing central banks worldwide to resort to unconventional tools as policy options shrink, they are also facing growing pressure to do their part in combating climate change. Prominent central bankers such as the ECB’s Christine Lagarde have promised to make the issue a priority, while the Federal Reserve flagged a new committee on Tuesday to make climate change a major part of its Wall Street oversight.

In another report published Wednesday, the Network for Greening the Financial System, a group of 89 central banks and supervisors that includes the Fed as well as the ECB, said climate-related changes to central banks’ operational frameworks are “feasible,” and outlined options on how the institutions can prod nations and companies to lower carbon emissions.

“Central banks clearly need to play their part in the joint global efforts to curb climate change as an urgent and universal challenge,” Frank Elderson, an ECB board member, and Sabine Mauderer, an executive at Germany’s Bundesbank, wrote in the foreword of the report. “While we cannot take on the tasks of governments, we also cannot be mere bystanders in the transition to a net zero economy.”

Sweden has passed a law requiring the country to reach net zero emissions by 2045, earlier than the EU average, and the Riksbank said the effect of climate change on monetary policy will become increasingly relevant, as extreme weather can lead to “greater fluctuation in food, housing and energy prices.” That, in turn, could affect inflation and inflation expectations, according to the central bank.

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