The impact of transitioning to a net zero economy on inflation is of concern to monetary policymakers, the Bank of England’s (BoE) economist has suggested.
Ms. Mann is a member of the BoE’s Monetary Policy Committee (MPC), which sets the bank rate and directs the government’s monetary policy.
British households could see higher bills, as companies pass the extra costs of environmental policy requirements on to the customers. This prompts a change in behaviour needed to reduce emissions, Ms. Mann said.
“Consumers themselves can demand products and services with a lower carbon footprint, thus raising their prices at least initially, which induces firms to invest in these less-emissions-intensive products,” she added.
Economists have warned of the “macroeconomic effects of climate policies,” Ms. Mann told the audience.
“So far, evidence has suggested upward pressure on inflation, downward effects on output, and generally a tendency for climate pricing shocks to be more persistent and volatile,” she said.
Carbon taxes, public investments, and subsidies have all been found to be inflationary, the BoE’s economist said.
She added that in countries with a lower-carbon intensity of the GDP, the effects of climate policies may be “quantitatively small.”
Net Zero Policies and Inflation
Ms. Mann’s comments come amid historically high inflation rate for the U.K. economy, currently at 6.7 percent. The government and financial bodies are keen to halve the inflation by the end of the year and eventually achieve the 2 percent target.In order to curb inflation hikes, the BoE would usually raise the interest rate, which it has been doing consecutively for almost two years.
Ms. Mann has warned that “quantitative effects are likely to rise” overtime, as “carbon pricing policies have more bite.”
Not every climate event will require monetary policy action, she said. But monitoring the impact is essential in order to achieve the two percent inflation target “sustainably in the medium term,” Ms. Mann warned.
This includes phasing out petrol and diesel vehicles by 2035, instead of 2030, new buildings with fossil fuel boilers by 2025, and oil and gas boilers in existing buildings by 2035.
A net-zero economy is high on the priority list for both the Conservative and Labour parties ahead of the next general election.
Ms. Mann acknowledged that policy design is “outside the scope of most monetary policymakers’ remit.”
However, she noted that it all comes back to macroeconomics getting affected–and this is “key to central bank decision-making, specifically inflation and economic activity.”