She co-authors a VoxEU analysis for CEPR on how climate affects inflation, output and the work of central banks
How do climate change and the green transition influence central banks’ decisions? This question is examined in an analysis co-authored by Danae Kyriakopoulou, Co-Head of the Bank of England’s Climate Hub and a member of Komvos’s International Advisory Committee.
The article “The implications of climate change for monetary policy” was published on CEPR’s VoxEU on 3 September 2026. Alongside Danae Kyriakopoulou, its authors are Solveig K. Erlandsen, Sui-Jade Ho, James Talbot and Edwin Millar. The analysis draws on a recent report by the Network for Greening the Financial System — NGFS on the implications of climate change for monetary policy.
The authors highlight how extreme weather events and transition policies can create a difficult trade-off: rising prices alongside weaker economic activity. Under these circumstances, stabilising inflation and supporting output may call for different policy responses.
When do climate shocks require a monetary policy response?
A temporary increase in the prices of certain products is not, on its own, a reason to raise interest rates. According to the analysis, the key question is whether the initial price increase will subside or develop into broader and more persistent inflationary pressure.
Climate events can reduce productivity and disrupt supply chains. The authors explain that their effects can be long-lasting, spread internationally and influence prices that households monitor closely, particularly those of food and energy.
The frequency of these shocks complicates the assessment. Successive events, even if each is temporary, can produce more persistent effects. They may also erode fiscal space and the private sector’s financial resilience.
The NGFS guide recommends systematically examining the nature of each shock, how it spreads through the economy and its effects on inflation and output. The response also depends on the wider economic context, government intervention, insurance coverage and the financial resilience of households and businesses. Monitoring and reassessment form part of this process.
The design of the green transition matters
As the authors explain, carbon pricing, green subsidies and regulatory measures affect costs and investment. Their consequences depend on the policy mix, the pace of implementation and the extent to which households and businesses can anticipate their course.
In the NGFS quantitative study cited in the analysis, carbon pricing can raise inflation and reduce output in the short term. The effects vary across economies, particularly according to their dependence on fossil fuels.
In the scenarios examined, inflationary effects are more moderate when policies are implemented predictably and credibly. Channelling carbon-pricing revenues into green subsidies can also mitigate some of the short-term effects on inflation and output. These are simulation results based on specific assumptions, while the benefits of avoiding future climate damage are examined separately.
Danae Kyriakopoulou focuses her work on the relationship between climate change, macroeconomics and financial stability. Before joining the Bank of England, she worked at the London School of Economics and served as Chief Economist and Director of Research at OMFIF.
