Climate risks pose macroeconomic challenges for central banks, particularly in Africa
A BIS paper highlights that climate change presents significant macroeconomic risks for central banking, affecting monetary policy and financial stability. These physical and transition risks are particularly relevant for African economies, where climate shocks propagate rapidly.
Physical and transition risks reshape economies
Climate change presents significant macroeconomic risks, directly impacting central banks' mandates for monetary policy and financial stability.
Physical risks, including more frequent extreme weather events, disrupt production and damage infrastructure, generating supply and demand pressures that affect output and inflation.
Transition risks, arising from climate policy and market shifts, can tighten financial conditions and alter relative prices, creating short-term adjustment costs and influencing long-term growth.
These dynamics are particularly relevant in African economies, where climate shocks propagate rapidly through food and energy channels, reflecting greater sectoral exposure and more limited fiscal and insurance buffers.
Simulations from the BIS-Multisector (BIS-MS) model show that climate-related shocks generate heterogeneous macroeconomic effects, with energy-intensive and agricultural economies experiencing stronger inflationary pressures, deeper output contractions, and larger policy rate adjustments.
This highlights the importance of strengthening data and modelling frameworks.
Africa's amplified climate exposure
African economies exhibit a notable macroeconomic exposure to climate change, despite their low contribution to global emissions.
The continent is warming faster and experiencing more frequent extreme weather events, leading to significant output losses and fiscal pressures.
This vulnerability is exacerbated by reliance on climate-sensitive sectors like agriculture and energy, alongside limited fiscal and insurance buffers.
Such structural features ensure climate shocks translate directly into persistent macroeconomic and financial instability.
Climate-related shocks weaken financial conditions for households, firms, and sovereigns, increasing credit risks and affecting financial institutions' stability, particularly in low-resilience financial systems with limited insurance coverage.
Climate: A core mandate, not an expansion
The paper compellingly argues that climate change directly impacts central banks' core mandates, necessitating its integration into monetary policy and financial stability frameworks.
Its focus on African economies provides crucial insights into how climate shocks amplify macroeconomic instability, demanding tailored policy responses.
This requires a proactive shift in analytical tools and supervisory practices for central banks, recognizing climate risk as an immediate and unavoidable economic factor.