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Informist, Tuesday, Oct. 15, 2024

 

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--RBI Patra: Inflation targeting-based policy may face more challenges ahead 
--CONTEXT: Comments by RBI Deputy Governor Patra at an RBI event on Monday 
--RBI Patra: Climate change poses existential threat to central bks' mandates 
--RBI Patra: Climate change can hit monetary transmission via many channels 
--RBI Patra: Adding climate change to inflation target framework a challenge 
--RBI Patra: Digitalisation can directly lower inflation via fall in IT costs 

 

NEW DELHI – Central banks around the world face an existential threat to their inflation mandates from climate change, Reserve Bank of India Deputy Governor Michael Patra said. The conduct of inflation targeting-based monetary policy may face even greater challenges in the years ahead, Patra said at the "Central Banking at Crossroads" event here on Monday, and the speech was released Tuesday. 

 

"Central banks face an existential threat to their central mandates from climate change through supply shocks such as food and energy shortages and through a decline in productive capacity which can translate to inflation volatility," Patra said. 

 

The deputy governor said that demand shocks can arise due to the loss of wealth of firms and households on account of frequent natural disasters. "Physical and transition risks can affect the balance sheets of financial institutions and banks, limiting the flow of credit to the real economy," Patra said. "Climate induced uncertainty can make households save more for precautionary purposes, bringing down the real equilibrium interest rate."

 

Climate change can also hit monetary transmission through several channels such as higher import costs and currency depreciation of countries frequently affected by climate disasters, leading to financial instability, Patra said. Several central banks have already started taking steps to support financing for climate change responses, and a consensus is hence "coalescing to the position that central banks are uniquely placed to address climate change", Patra said, adding that incorporating climate change into inflation targeting frameworks is a challenge.

 

Another factor that can impact monetary policy in the future is digitalisation, Patra said. "Digitalisation can directly lower inflation rates through a decline in the prices of information and communication technology-related goods," the deputy governor said. "Digital technologies can also influence inflation indirectly through changes in firms' price-setting behaviour and market dynamics, with competition enabled by e-commerce."  End

 

Reported by Shubham Rana

Edited by Vandana Hingorani

 

 

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