How should central banks respond to climate shocks? Two new NGFS reports set out the implications of climate change and the transition to net zero for monetary policy strategy

Climate change and the transition to net zero emissions can have significant implications for monetary policy as they may affect prices and growth. The two reports "Climate change and monetary policy strategy: a guide for central banks" and "The macroeconomic effects and monetary policy implications of climate mitigation policies: results from a new quantitative analysis" build on prior NGFS analysis to guide monetary policymakers as they respond to the physical impacts of climate change and the transition to net zero. 

Climate change and monetary policy strategy: a guide for central banks

This report considers how climate change and the transition to net zero affect monetary policymakers' core price-stability mandates. Designed as a practical guide for central banks, the report

• establishes a framework for monetary policymakers to assess climate-related trade-offs between stabilising inflation and output;
• presents new quantitative analysis of the implications of physical and transition impacts for monetary policy strategy;
• explores the impact of climate change on monetary policy transmission and structural variables such as the natural rate of interest;
• discusses practical communication approaches that can help anchor expectations and preserve credibility in the face of climate-related uncertainty;
• provides a practical step-by-step process that monetary policymakers can follow when responding to a climate-related event.

To read the full report, please click here.

The macroeconomic effects and monetary policy implications of climate mitigation policies: results from a new quantitative analysis

This report explores the monetary policy implications of climate mitigation policies using the IMF's Global Macroeconomic Model for the Energy Transition (GMMET). It shows that climate mitigation policies can generate trade-offs for monetary policymakers between stabilising inflation and economic output. The scale of these trade-offs varies across jurisdictions and depends on the specific transition policies adopted. Trade-offs are smallest when transition policies are implemented in a gradual and orderly manner but can be more substantial when policies are uncertain. Despite these near-term trade-offs, the most severe impacts of climate change occur in the absence of transition. 

To read the full report, please click here. 

Sabine Mauderer, Chair of the NGFS and First Deputy Governor of the Deutsche Bundesbank:

"Climate change and the transition to net zero are increasingly affecting inflation, output, and monetary policy. These two new reports provide central banks with practical guidance and new evidence to assess the macroeconomic effects of climate change and mitigation policies as well as their impact on monetary policy. The message is clear: an early, orderly, and credible transition can help limit macroeconomic and financial risks, while delay would make the adjustment more costly and more disruptive. Central banks do not set climate policy, but they must understand and respond to its implications within their mandates, supported by robust analysis, scenario-based evidence, and clear communication. These reports can help central banks to meet this challenge." 

James Talbot, Chair of the NGFS Workstream on Monetary Policy and Executive Director of the International Directorate at the Bank of England:

"Climate change and the transition to net zero emissions are reshaping the macroeconomy in ways that matter directly for central banks' core mandates. Physical and transition-related impacts can affect both inflation and output, potentially generating trade-offs for monetary policymakers, particularly as physical climate shocks become more frequent, severe and persistent. These reports provide a practical guide for monetary policymakers to assess these shocks, understand when trade-offs are likely to arise, and judge how they should be managed within their mandates. By bringing together an analytical framework, new quantitative analysis and practical guidance on communications, the reports support central banks in effectively responding to the impact of climate change on economies."

About the NGFS

The Network for Greening the Financial System (NGFS), launched at the Paris One Planet Summit on 12 December 2017, is a group of central banks and supervisors, which on a voluntary basis is willing to share best practices and contribute to the development of environment and climate risk management in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy. The NGFS brings together 152 central banks and supervisors and 24 observers. The NGFS Chair is Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, and its Vice Chair is Fundi Tshazibana, Deputy Gouvernor of the South African Reserve Bank and CEO of the Prudential Authority. The Secretariat, headed by Yann Marin, is provided by Banque de France.

For more details, visit the NGFS website, Linkedin and 2024 Annual Report or contact the NGFS Secretariat at Banque de France sec.ngfs@banque-france.fr

Press Office at the Banque de France: +33 (0) 1 42 92 39 00/ presse@banque-france.fr