NBS: Central Banks Must Understand Climate Change

Bratislava, 8 June (TASR) - Central banks need to understand climate change because its consequences directly affect the areas for which they are responsible, namely price stability and financial system stability — climate risks are gradually becoming part of routine investment, budgeting and risk-management decisions, according to a blog post by the Slovak central bank's (NBS) head of climate sustainability Roman Vasil. "Climate change is now part of central bankers' discussions about future developments in inflation and the stability of the financial sector," underlined Vasil. NBS has therefore prepared a climate strategy defining how it will approach climate-related risks. "Extreme weather fluctuations are changing the rules of the game in the economy and finance, and central banks are preparing for their consequences. This trend is also being confirmed by temperature data in Slovakia, according to which the past five years rank among the warmest since records began," he added. The central bank's role is to ensure that money retains its value and that the financial system can withstand unexpected economic shocks. It usually intervenes when the prices of goods and services rise faster than desired, therefore. According to Vasil, the problem is that climate change can trigger inflation that cannot be effectively addressed by traditional monetary policy tools that have been used for decades. For example, if floods destroy bridges or extreme heat reduces agricultural yields, prices will rise regardless of how many times the central bank increases interest rates. From the perspective of banks and the financial sector, physical risks such as floods, droughts and flash floods are linked to direct damage caused by extreme weather. Household and corporate assets may be destroyed or lose their value, while banks that have provided loans against those assets may not recover all the money lent. There are also transition risks arising from the shift to a low-emission economy. As a result, climate risks are increasingly becoming part of standard investment, budgeting and risk-management decisions. Insurers are already raising premiums for certain properties in flood-prone areas or refusing coverage altogether, said Vasil. Banks are beginning to factor climate risks into loan pricing, while companies that ignore decarbonisation face rising costs. mf/df