One step closer to green monetary policy

In a world first, the Bank of England’s (BoE) mandate has been updated to include action on climate change. The Chancellor of the Exchequer made the announcement during yesterday’s budget speech (35.24):

An updated monetary policy remit for the Bank of England. It reaffirms their 2% target but now it will also reflect the importance of environmental sustainability and the transition to net zero.

The BoE’s primary mandate has been to keep inflation steady, and subject to that, help the government increase growth and employment.

Now there’s more.

From the Chancellor’s letter to the Governor of the Bank of England

I am today updating the MPC’s remit to reflect the government’s economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy.

The Bank of England has responded:

In the coming months, we will provide more information about our proposed approach to adjusting the Corporate Bond Purchase Scheme (CBPS) to account for the climate impact of the issuers of the bonds we hold, with a view to adapting our approach by the time of our next scheduled round of reinvestment operations in 2021 Q4.

I’ve discussed green quantitative easing several times before (here, here, and here for a recap). Today’s announcement will make it a reality in the UK. “our proposed approach to adjusting the CBPS to account for the climate impact of the issuers of the bonds we hold,” is more momentous than it sounds. The BoE will now take climate impact into account when it buys corporate bonds. This could mean applying a penalty to the bonds of big polluters, or even avoiding them entirely. Central banks already discriminate between bonds today, requiring greater collateral or higher interest rates for bonds with more financial risk. Climate risk will now be included. The consequence could be higher borrowing costs for polluters, as the bond market follows the BoE in labeling polluters as higher risk.

It will take several months before we see this new remit translated into practice. Still, today’s a day to celebrate.

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