Consideration of climate in monetary policy

A key rationale for the interest of central banks in climate issues is the fact that climate change and climate policy have an impact on price developments. For example, extreme weather phenomena, which are becoming increasingly common due to climate change, may increase insurance premiums and other contingency costs, for example in construction. The increase in average temperature may accelerate, for example, food inflation.

On the other hand, the transition to a low-carbon economy necessitates changes in relative prices so that low-emission alternatives become attractive in comparison with more polluting options. Environmental taxes, emissions trading and subsidy measures with this same objective will have impacts that may diverge. To a large extent, the effect on price stability will also depend on how controlled the price changes are.

Since climate change may increase uncertainty, impair productivity and reduce willingness to invest, it may lower the so-called natural level of interest rates, an imputed level where economic resources are fully utilised and inflation is in line with the price stability target. In contrast, if the transition to low carbon incentivises new innovations and investments that improve productivity, the effect on the natural level of interest rates may be upward.

In monetary-policy corporate bond purchases, increasing attention is being paid to climate factors by applying an analytical company-specific indicator of climate impacts. The Eurosystem has purchased corporate bonds since 2016. The Bank of Finland is one of the six national central banks in the euro area carrying out the purchases under the corporate sector purchase programme. The purchases are weighted towards issuers whose business is less emission intensive, which have credible and ambitious targets to reduce emissions and which also consider climate change in their reporting. As regards the issuance of new corporate bonds, the Eurosystem’s bid also reflects whether the issue in question is a so-called green bond.

The Eurosystem's monetary policy corporate bond purchases always depend primarily on monetary policy targets in accordance with the price stability mandate. The use of the ECB's purchase programmes in mitigating climate change and promoting the green transition is most effective when monetary policy is expansionary and the purchase programmes are large and longstanding. Since the Eurosystem is a significant operator in the euro-area corporate bond market, the integration of climate factors in its corporate bond purchases may also have a more extensive impact on market practices and incentives.