Central banks must now account for climate change in their economic models

A new paper from the Bank for International Settlements says that central banks can no longer ignore climate change when setting monetary policy. Climate shocks, like extreme weather, directly affect inflation and economic output, especially in countries with large agricultural or energy sectors.

For decades, central banks focused on traditional economic indicators like interest rates and unemployment. This paper argues that physical climate risks and the economic shifts from climate policy are now core macroeconomic issues. It means central banks will have to start building climate models into their core operations, which is a big change for a very conservative institution.