Heat waves may drive up inflation, and the European Central Bank incorporates "natural risks" into monetary policy considerations

According to the Zhitong Finance APP, Frank Elderson, a member of the Executive Board of the European Central Bank, recently pointed out in an interview that global awareness of the importance of climate and nature crises is deepening. He cited the example of extreme high temperatures in 2022, emphasizing that the inflation rate of food prices in Germany rose by 0.4 to 0.9 percentage points as a result, significantly impacting the Gross Domestic Product (GDP). This statement comes at a time when many regions in Europe are once again experiencing unusual heat waves, with regional high temperatures becoming a typical case of how climate change affects price stability—scientists generally believe that global warming will exacerbate the difficulty of crop cultivation, thereby driving up food prices.

In this context, the European Central Bank is accelerating the construction of a policy framework to address climate-related economic risks. The policy adjustments announced this week indicate that the institution has incorporated climate change and "natural degradation" impacts into systematic considerations when formulating monetary policy. Elderson stated during the European Central Bank's annual meeting in Sintra, Portugal, that this decision is an important supplement to traditional policy dimensions. In the future, natural risk factors will be fully integrated into the European Central Bank's work to ensure price stability and regulate systemically important banks.

It is noteworthy that the European Central Bank's policy shift stands in stark contrast to that of the Federal Reserve. Although Federal Reserve Chairman Jerome Powell has acknowledged the potential threats of climate change to the U.S. economy and financial system, he has repeatedly emphasized: "We will not become climate policymakers; that role is very, very narrow." Reports indicate that the Federal Reserve has even attempted to downplay the impact of climate change on financial stability, including intervening in global standard-setting processes, such as those of the Basel Committee on Banking Supervision.

In response to external doubts, Elderson emphasized that the Governing Council of the European Central Bank still adheres to its established position: "Based on existing research, we recognize that we need to focus not only on the one-way impact of climate on price stability." He revealed that the institution is continuously analyzing the transmission mechanisms of events such as the extreme weather of summer 2022 on inflation and economic growth, aiming to establish more forward-looking analytical models.

Regarding the complexity of natural risk management, Elderson pointed out its essential differences from carbon emissions: "There is no single quantifiable indicator like carbon dioxide; we must comprehensively consider multidimensional factors such as fish resources, forest coverage, soil quality, water resource scarcity, and water quality pollution." He revealed that in the short term, the institution will explore the impact mechanisms of these variables on macroeconomic operations, inflation trends, and debt sustainability by expanding research coverage and strengthening the application of results.

On the design direction of policy tools, Elderson stated that the successful experience of addressing climate risks will continue: "Whether it is developing new policy tools, assessing collateral quality, or adjusting asset purchase strategies in the future, natural risk factors will become a core consideration dimension." He emphasized that ignoring such risks will prevent regulatory agencies from fully assessing the credit risks of the banking system, "which has become a key link in maintaining financial stability."