Federal Reserve Board Chairman Jerome Powell holds a news conference following the announcement that the Federal Reserve raised interest rates by half a percentage point, at the Federal Reserve Building in Washington, US, December 14, 2022.

Evelyn Hockstein | Reuters

LONDON — Divisions are forming among the world’s most influential central banks over their role in tackling climate change, as policymakers focus on reining in inflation.

US Federal Reserve Chairman Jerome Powell told a conference hosted by Sweden’s central bank on Tuesday that the Fed would not become a “climate policymaker” or get involved in matters beyond its congressionally established mandate.

Some Democratic lawmakers had expressed a desire for the Fed to play an active role in shoring up the US financial system to weather climate-related risks.

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By contrast, European Central Bank Board member Isabel Schnabel said the Frankfurt-based institution needed to adjust its policy approach to become more climate-friendly, even as it continues to shrink its balance sheet and hike interest rates, to combat sky-high inflation in the euro zone.

The ECB would need to “move from a flow-based to a stock-based tilting approach for our corporate bond portfolio,” Schnabel told the same Sweden event. “This means that, absent any reinvestments, actively reshuffling the portfolio towards greener issuers would need to be considered.”

The surge in inflation and rising interest rates have derailed the plan to redirect ECB corporate bond holdings towards greener assets in support of the energy transition. The central bank has been forced to halt its bond purchases, as it looks to shrink its balance sheet.

Schnabel’s comments were contested by fellow policymaker and National Bank of Belgium Governor Pierre Wunsch.

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Wunsch said it was down to governments to combat climate change and that talk of monetary policy financing the green transition was a “misunderstanding of what our role is.”

Bank of Japan Governor Haruhiko Kuroda echoed this skepticism, telling the conference that any climate-geared policy decisions must remain within the respective mandates of central banks and avoid jeopardizing the market neutrality of policymakers.

In a June 2022 statement, the Bank of England said a key aspect of its mission to ensure UK monetary and financial stability was to “manage the financial risks and economic consequences arising from the physical effects of climate change and the transition to net-zero emissions on our policy functions and internal operations.”

Yet Governor Andrew Bailey echoed Powell’s apparent hawkishness on Tuesday by indicating that the Bank’s Monetary Policy Committee would not take interest rate decisions based on their potential impact on climate change.

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