PARIS (Reuters) - The European Central Bank should take climate change into account in the way it runs monetary policy, ECB policymaker Francois Villeroy de Galhau said on Wednesday, backing a suggestion from the bank’s incoming chief.
Christine Lagarde, who is due to take over from ECB President Mario Draghi on Nov. 1, told the European Parliament earlier this month that new challenges like climate change warranted a deep dive into how policy is conducted.
“We should, as Christine Lagarde said at the European Parliament, take climate change into account in monetary policy,” Villeroy, who is also head of the French central bank, said in a speech at Paris’ Sciences Po university.
In London on Tuesday, Villeroy poured cold water on calls for a climate change-focused quantitative easing program, saying such a move would heavily distort the green bond market.
Though fast growing, the green bond market is still relatively small compared to other bond markets and a major purchaser like a central bank could cause big ripples.
Villeroy said that climate change represented a long-term risk to financial stability and urged stress tests on banks and insurers to ensure those future risks are taken into account today.
On the economic front, Villeroy said that climate risk was ultimately a stagflationary risk, slowing growth and raising prices at the same time, both of which central banks track closely when they set rates.
Lastly, he said that the ECB should take climate change risk into account in estimating the value of collateral banks post with the central bank in exchange for credit.
Reporting by Leigh Thomas; Editing by Geert De Clercq