Central banks raising interest rates makes it harder to fight the climate crisis

(The Guardian, 6 May 2023) Higher rates slow the renewable energy transition and shield oil and gas producers from competition by low-carbon producers.

In late 2021, consumer price inflation surged in many countries. Prices shot up again following Russia’s invasion of Ukraine in February 2022. In response, central banks drastically tightened monetary policy – raising interest rates from near zero to around 5% or more. Since the interest rate hikes have failed to bring down core inflation to the target rate of 2% favored by the Federal Reserve and the European Central Bank (ECB), the pressure for further rate hikes has been insistent.

We have long doubted that central bank rate rises could control the new inflation at a socially acceptable price. In most countries, wages lag well behind inflation. Too much of the rise in prices clearly reflects the impact of higher profit margins and obvious supply bottlenecks.

In such conditions, leaving control of inflation to central banks is like asking an old-time central bank to fix a harvest failure. Only targeted policies to increase output and control profit margins in strategic sectors, not general increases in the price of borrowed money, have much chance of working.

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The Guardian, 6 May 2023: Central banks raising interest rates makes it harder to fight the climate crisis