Uncertainty linked to climate change and policies to mitigate its impact is acute, and the effect the economy and financial system as well as the implications for monetary policy is yet unclear, Reserve Bank of Australia Deputy Governor Michele Bullock said Tuesday.
“The timing and intensity of effects are uncertain, and these could be severe and irreversible if tipping points are reached,” RBA Governor-designate Bullock said.
“In addition, it is unclear how the policies, preferences and technologies associated with climate mitigation will evolve.”
Climate change largely affects the supply-side of the economy, but it may also have an impact on longer run concepts like potential output and the neutral real interest rate that can help to determine the appropriate stance of monetary policy, the central banker said.
“These concepts are difficult enough to assess in real time in the normal course, let alone when climate change is introducing additional variability and uncertainty,” Bullock said.
There is also a question about whether climate-related trends could cause central banks to re-examine the relative merits of flexible inflation targeting, Bullock pointed out. The RBA review has found that flexible inflation targeting has served the bank well, she added.
Bullock will be the first female to hold the position of the RBA Governor when she replaces the incumbent Philip Lowe mid-September.
The Australian central bank left its cash rate target unchanged at 4.10 early this month, defying expectations for a quarter-basis point hike.
Economists are looking forward to more tightening from the RBA by the year-end as the economy is cooling, the labor market remains tight, and inflation is yet to show a sustainable decline.
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