Climate Change: Emerging variable in monetary policy
inflation data when it is issued on Friday. Inflation for the month is likely to rise 5% year-on-year, higher than the trend expected earlier in the month, according to a senior economist at a global bank. Climatic factors are playing an increasingly key role in influencing food and fuel inflation, which tends to impact overall inflation levels, creating a new area of concern for policymakers. Gayatri Nayak explains how climate change can impact monetary policy:
How have climatic factors affected prices in India?
In India, the erratic progress of monsoons has had an impact on food and agricultural product prices from time to time. But seldom has one witnessed a price rise due to other weather conditions. However, heatwaves in many parts of the country have impacted vegetable supplies to major markets. Prices of essential vegetables such as tomatoes, potatoes, coriander, onion, cucumber and green chilli have surged by 25-100% in June, according to market estimates.
Does climate change impact monetary policy?
Yes. There are different channels through which climate change can affect monetary policy. The Reserve Bank of India's latest monetary policy report has some details. First, climate change directly impacts inflation through adverse weather events affecting farm output and global supply chains. Second, climate change could impact the natural rate of interest due to increasing temperatures and the occurrence of extreme weather events undermining productivity and lowering potential output. Thirdly, the
