Central Bankers Debate Involvement in Climate Change Mitigation Amid Inflation Concerns

There are growing divisions among the world's most influential central banks over their role in tackling climate change, as policymakers focus on reining in inflation.

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U.S. Federal Reserve Chairman Jerome Powell told a conference hosted by Sweden’s central bank on Tuesday that the Fed would not become a “climate policymaker” or get involved in matters beyond its congressionally established mandate. Powell said that the Fed’s focus is on maintaining a strong economy and that it is not the role of the central bank to get involved in climate policy.

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Some Democratic lawmakers have called for the Federal Reserve to take active measures to protect the U.S. financial system from risks associated with climate change.
In contrast, European Central Bank board member Isabel Schnabel said the Frankfurt-based institution needs to adjust its policy approach to become more climate friendly. Even as it continues to shrink its balance sheet and hike interest rates to combat sky-high inflation in the euro zone, the ECB can take steps to make its policies more environmentally friendly.

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Schnabel told an event in Sweden that the ECB would need to "move from a flow-based to a stock-based tilting approach for our corporate bond portfolio." This would involve actively reshuffling the portfolio towards greener issuers, without reinvesting any of the proceeds.

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The recent surge in inflation and rising interest rates have caused the European Central Bank (ECB) to halt its plan to redirect corporate bond holdings towards greener assets in support of the energy transition. With the central bank looking to shrink its balance sheet, it has had to stop its bond purchases.
Schnabel's comments were challenged by fellow policymaker and National Bank of Belgium Governor Pierre Wunsch.

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Wunsch said that it is up to governments to combat climate change and that talk of monetary policy financing the green transition is a misunderstanding of what our role is. Bank of Japan Governor Haruhiko Kuroda has expressed skepticism about climate-related policy decisions, saying that they must remain within the respective mandates of central banks and avoid jeopardizing the market neutrality of policymakers.

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In a statement released in June 2022, the Bank of England stated that one of its key objectives is to manage the financial risks and economic consequences associated with climate change and the transition to net-zero emissions. The Bank noted that this is an important part of its mission to ensure U.K. monetary and financial stability.
Governor Andrew Bailey indicated on Tuesday that the Bank of England's Monetary Policy Committee would not take interest rate decisions based on their potential impact on climate change. This echoes the apparent hawkishness of Powell's remarks.