ECB Warns of Impact of Heat Waves on Inflation, GDP Growth

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(Bloomberg) -- The link between heat and key economic indicators such as inflation and gross domestic product is too important to ignore, according to European Central Bank Executive Board member Frank Elderson.
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'We have progressed in understanding that accounting for the climate and nature crises is relevant,' Elderson said in an interview. 'If you think about the exceptionally hot summer of 2022, food-price inflation was up between 0.4 and 0.9 percentage points' and 'there was quite a measurable hit on German GDP.'
'So these things are relevant,' he said.
The comments coincide with another European heat wave in which much of the region has experienced unusually high temperatures fueled by climate change. Scientists have found that a hotter planet has the potential to threaten price stability, in part as crops become more difficult to tend and food prices rise.
Against that backdrop, the ECB is now intensifying its efforts to deal with climate-related economic risks. That includes adjustments unveiled this week showing that it will fully take into account not just the implications of climate change, but also 'nature degradation' when setting monetary policy.
The decision represents an 'important addition' to the wording used by the central bank, Elderson said on the sidelines of the ECB's annual conference in Sintra, Portugal.
The new focus on nature-related risks will eventually feed into various aspects of the ECB's efforts to ensure price stability and to supervise Europe's systemically important banks.
The approach is in stark contrast to that of the Federal Reserve. While Chair Jerome Powell has in the past acknowledged the threats that climate change poses to the US economy and financial system, he's also repeatedly stressed that the Fed doesn't have a mandate to foster a low-carbon transition.
'You heard me say over and over again that we will not be climate policymakers,' Powell said during a press conference in May. 'Our role on climate is a very, very narrow one.'
The Fed's efforts to downplay the relevance of climate change in safeguarding financial stability have also encompassed interventions to water down global standards, including those set by the Basel Committee on Banking Supervision, Bloomberg has previously reported.
Even in Germany, Europe's largest economy, there's clear evidence of resistance toward policies promoting climate and human rights considerations. Stiftung Familienunternehmen, a lobby dedicated to defending the interests of family businesses, issued a statement on Friday questioning the constitutionality of incorporating such standards in European regulations.
Elderson said that 'whilst there's a backlash out there,' the ECB Governing Council 'sticks to its guns and actually adds to that to say we now understand on the basis of the work that has been done that we need to think beyond just what climate means for price stability.'
The ECB is still studying events such as the summer of 2022 and its impact on inflation and GDP to get a sense of what's ahead, Elderson said.
Nature risk, meanwhile, 'is complicated because there is not one single metric like CO2,' Elderson said. Instead, 'you have to look at fish stocks, you have to look at timber, you have to look at the soils, you have to look at water scarcity and water quality.'
In the short term, there will be 'more research, more outreach,' he said. 'Then we need to ask: what does this mean for our understanding of the economy, for our understanding of inflation? What does it mean for debt sustainability?'
Ultimately, the response may be similar to the ECB's efforts to tackle climate risk, he added.
'Whenever we design an instrument or whenever we think about collateral or when we think about tilting of asset purchases at some point in the future, we take this into account,' he said. 'If you were to close your eyes to that, you would also miss an important part of credit risk for at least some of the banks that we supervise.'
--With assistance from Nicholas Comfort, Joe Wertz and Rachel Morison.
(Adds statement from German business lobby in 11th paragraph.)
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