Central Banks Confront Climate-Induced Inflation Challenges

Summary:
Climate change is increasingly recognized as a significant threat to financial stability and price stability, with the Reserve Bank of India (RBI) identifying it as a contributing factor to persistent inflation. In its April 2024 report, the RBI noted that extreme weather and erratic rainfall could raise headline inflation by about 100 basis points and potentially reduce long-term economic output by 9% by 2050. The recent HSBC Purchasing Managers’ Index (PMI) survey indicated a decline in manufacturing activity due to heatwaves and rising production costs.
The RBI emphasizes the need for integrating climate variables into traditional inflation forecasting models to better predict supply-side inflationary pressures. Strengthening regulatory monitoring of climate-sensitive sectors, credible communication, and measured policy responses are crucial steps. Additionally, coordinating with fiscal counterparts on climate policies and extending policy horizons to account for long-term climate impacts are recommended.
The article underscores the necessity for the RBI to adapt its monetary tools and engage proactively with the government to address the multifaceted threats posed by climate change, thereby ensuring price stability and financial resilience.