Climate Change Hinders Monetary Policy Efficacy: RBI Report

The Reserve Bank of India (RBI) report highlighted that climate change-induced weather shocks present challenges for monetary policy and pose risks to economic growth.

It noted a rise in global average temperatures and an increase in extreme weather events, emphasising the evident economic and social impacts of global warming. 

The report underscored that climate change has amplified the frequency and intensity of weather shocks, presenting monetary policy challenges through various channels. These include direct impacts on inflation via adverse weather affecting agriculture and global supply chains, potential effects on the natural interest rate, and potential disruptions to the transmission of monetary policy actions to households and firms.

Recognizing these risks, central banks are increasingly integrating climate risks into their modelling frameworks.

The report warned that without climate mitigation policies, long-term output could be reduced by approximately 9 per cent by 2050 compared to a scenario without climate change. This reduction in productivity may lower the natural interest rate, while frequent inflation shocks may necessitate tighter monetary policy despite this lower rate. Additionally, the report stressed that climate change-induced weather disturbances pose downside risks to the baseline growth trajectory.