Pablo Hernández de Cos: What will be the impact of climate transition on monetary policy?

Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain and Chair of the Basel Committee on Banking Supervision, at the Central Banking Summer Meetings, 14 June 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Ladies and Gentlemen,

Let me start by thanking the organisers for the invitation to speak at these Central Banking Summer Meetings.

Climate change could be a defining issue for our generation. It is therefore natural that climate change has come to the fore of the concerns of policy-makers. And we, financial regulators, supervisors and central bankers, have our share of responsibility too in the joint global effort to tackle climate change. Not surprisingly, climate change is one of the key topics in the ongoing review of the ECB's monetary policy strategy or on the work programme of the Basel Committee.

Today I will focus, first, on how climate change affect (a) the financial sector, (b) inflation and (c) the natural interest rate. Second, I will tackle the issue of what regulators, supervisors and central banks can do to address climate change, within our mandates.

Climate risks and the financial sector

The financial sector is highly exposed to risks associated with climate change by funding other sectors including those exposed to extreme weather events or those that will be affected by the transition to a more sustainable economy.

The impact of climate change on the financial sector can, therefore, be relevant for financial stability. And it can also be relevant from our monetary policy perspective, since the transmission of our monetary policy actions to economic activity and inflation operates mainly through the financial system. Indeed, a sound financial sector is a prerequisite for a smooth transmission of monetary policy measures to the financing conditions faced by economic agents and, ultimately, to economic activity and inflation.