Climate change risk should be part of monetary policy: ECB’s Villeroy

PARIS (Reuters) – Central banks should take into account climate change risks not only as part of ensuring financial stability but also when setting monetary policy, ECB policymaker Francois Villeroy de Galhau said on Thursday.

Central banks have so far focused largely on the impact of climate change risks on big investors’ liabilities and how they can help improve conditions for low-carbon investments.

However, Villeroy, who is also governor of the French central bank, said that monitoring climate change risks stretched further.

“It is also part of our mandate for monetary policy because climate change affects price evolutions, effects the economic outlook,” Villeroy told French asset manager Amundi’s annual investment forum in Paris.

Although climate change is often seen as a short term risk, he pointed to its effects in the short-term, such as low levels of the Rhine River affecting German growth last summer.

“If you look at the economic effect of climate change, it’s probably in the long run a stagflationary shock with higher prices and lower economic output. This is one of the most difficult shocks we central bankers have to deal with.”

Central banks should include climate change risk in their economic models used in monetary policy, notably by pushing out their forecast horizons, he said.

However, they need to go even farther by taking climate risks into account when they assess the financial risks of collateral that banks post with them to get liquidity. Villeroy said this would represent “a very powerful change of our monetary policy”.

A network of some 40 central banks and financial sector regulators issued a warning about the financial risks relate to climate change at an event held at the Bank of France.