Climate Change Now a Macroeconomic Factor, Central Banks Must Adapt

Climate change is no longer solely an environmental issue but has become a significant macroeconomic factor influencing inflation, growth, productivity, and investment, according to a new report by the Network for Greening the Financial System (NGFS). The NGFS, an international network of central banks and financial supervisors, emphasizes that while governments are responsible for setting climate policy, central banks must understand and respond to the economic consequences within their mandates of price stability and financial system resilience.

Extreme weather events, supply chain disruptions, reduced labor productivity, and rising food and energy costs all impact inflation and economic activity, potentially creating stagflationary scenarios. The report also acknowledges that the transition to a net-zero economy has short-term costs, including carbon taxes and increased demand for critical minerals, which could fuel inflation. However, it stresses that an early, consistent, and coordinated transition will be far less costly than delaying action.

The NGFS report further highlights that climate change affects not only inflation targets but also the transmission mechanisms of monetary policy. Impaired credit, increased uncertainty, and shifts in investment and risk assessment can alter the effectiveness of interest rate policies. Additionally, research suggests climate change may influence the real risk-free interest rate through its impact on productivity, investment, and savings, necessitating a focus on structural economic changes.

For small, open economies like Israel, which rely on international trade and are exposed to geopolitical shifts and supply chain shocks, the impact of climate events could be particularly rapid and significant, compounded by security, infrastructure, water, and energy challenges. The report clarifies that central banks are not being asked to lead climate policy but to deepen their understanding of the evolving economic reality and its implications for inflation, financial stability, and public trust.

Ultimately, the report argues that in an era of climate change, the boundaries between economics, environment, technology, and security are blurring. While institutional responsibilities remain, the operational environment is rapidly changing, making a deeper understanding of these interdependencies crucial for long-term economic resilience and price stability.