Central banks must not lead fight on climate change

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Central banks risk undermining independence by wading into social issues and seeking to tackle climate change, the head of the US Federal Reserve has warned.

Jerome Powell said it was essential that institutions “resist the temptation” to wade into “social issues” that go beyond their remit.

His comments are likely to be seen as a rebuke to the Bank of England, which has been criticized by politicians for its approach to climate change. Threadneedle Street has described managing financial risks from climate change a “key aspect” of delivering its “mission” to “promote the good of the people”. He has also faced accusations of mishandling the inflation crisis by acting too late and slowly.

Mervyn King, who was governor of the Bank of England for a decade until 2013, echoed Mr Powell’s comments on Tuesday, as he warned that central bank independence came with “great responsibility”.

Speaking at the same conference in Sweden, Lord King said: “It cannot be misused by trying to creep into areas which have not been explicitly delegated by the appropriate political process.

“There are plenty of other people who can take measures to combat climate change. And I worry that people in their great enthusiasm for doing good are actually putting at risk central bank independence.”

Mr Powell singled out climate change as an “inappropriate” topic for unelected central bankers to address.

He told the audience in Stockholm: “We should stick to our knitting and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals.

“We [Federal Reserve] are not and we will not be a climate policymaker.

“Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.”

The Fed has come under fire in the past from Republicans in Congress who have accused it of overreach when it pledged to consider climate-related financial risks.

Last year, Republicans blocked the appointment of Sarah Bloom Raskin to be the Fed’s top banking regulator after she expressed support for using financial rules to police climate change.

Mr Powell said it was vital that decisions outside the Fed’s remit on issues such as climate change were taken by elected politicians who “reflect the public’s will as expressed through elections” because of the costs of going green for households and businesses.

Politicians in the UK have also criticized the Bank of England for its approach to climate changeafter it warned that the City is at risk of more than £340bn of losses from global warming.

MPs said last May that Threadneedle Street should “focus on the basics of monetary economics” such as taming rampant inflation, which hit its highest level in 41 years amid surging energy costs.

In the past year he has also examined how exposed financial institutions are to climate risks. The Bank has also set a goal to reduce emissions at Threadneedle Street and its other physical operations by 63pc in 2030 from 2016 levels.

Meanwhile Mark Carney, a former Bank of England governor who is now a special climate envoy for the United Nations, has warned that pension fund investments held by millions of people could become “worthless” unless the financial sector reacts quicker to the climate change crisis.

Mr Powell said the central bank had “narrow but important responsibilities” tied to bank supervision.

But he added: “Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools, for example, to promote a greener economy or to achieve other climate based goals.”

Other central bankers suggested central banks did have a role in the green transition. Yi Gang, the governor of China’s central bank, said: “A central bank can do a lot to help the transition. Since China’s emissions are so large, I particularly feel that we have a very heavy task on our shoulders.”

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