Central Banks Face Complex Inflation Challenges Amid Climate Change

As climate change intensifies, central banks are navigating an increasingly complex financial landscape shaped by environmental risks and the global shift toward greener economies.

Climate change poses a dual challenge for monetary policy through both physical risks—such as extreme weather events—and transition risks arising from the policies aimed at decarbonizing economies. Physical risks, including floods, heatwaves, and storms, often exert upward pressure on prices, particularly food, as supply chains are disrupted and agricultural productivity declines. Meanwhile, the long-term structural changes required for the green transition add an extra layer of complexity, as new policies, technologies, and shifts in consumer preferences have both inflationary and disinflationary effects. For instance, while higher carbon prices may increase costs for consumers in the short term, advances in green technologies and greater adoption of clean energy are expected to contain inflation over the longer run—provided the transition is managed in an orderly and predictable way. Throughout this ongoing transformation, anchoring inflation expectations and maintaining price stability remain central banks’ core responsibilities, even as they facilitate structural shifts in the broader economy.

The significance of this evolving interplay between climate and monetary policy cannot be overstated, as it will help determine both the resilience of the financial system and the success of the global green transition in the years ahead.