Climate change will impact interest rates, incoming RBA boss says

The incoming RBA governor has warned of a looming threat that will guide future interest rate rises.

Incoming Reserve Bank boss Michele Bullock has warned the RBA will consider climate change when setting future interest rates.

Australians are enjoying a much needed two-month reprieve from soaring interest rises after twelve consecutive rate rises caused massive pain for mortgage holders.

However, now the new Reserve Bank boss has warned there is a new threat on the horizon that will have a major impact on the stability of the Australian economy.

“Climate change and the actions taken in response will have broad-ranging implications for the economy, the financial system and society at large,” she said in an address to the Australian National University in Canberra on Tuesday.

“The timing and intensity of effects are uncertain, and these could be severe and irreversible if tipping points are reached,” she said.

Incoming RBA governor Michele Bullock has warned that climate change will impact the setting of interest rates. Picture: ABC News

She said the bank expects climate change will impact the economy’s capacity to produce goods and services, and have flow on effects on interest rates.

“It might also affect the neutral interest rate and, therefore, the stance of monetary policy,” she said.

“These concepts are difficult enough to assess in real-time in the normal course, let alone when climate change is introducing additional variability and uncertainty.”

Ms Bullock will begin her new job as RBA governor on September 18, succeeding current governor Philip Lowe who became the target of fierce criticism over misleading comments made during the height of the pandemic.

It was a pointed decision by the incoming governor to focus the attention of her speech on the impact of climate change on monetary policy.

She explained that climate change and the actions taken to respond to it will have “broad-ranging implications” on the economy, financial system and the economy at large.

Ms Bullock will take over as Reserve Bank governor when Philip Lowe’s contract ends in September. Picture: NCA NewsWire / Martin Ollman

“As the Review of the Reserve Bank has helpfully reinforced, climate change will have implications for price stability, employment and the stability of the financial system,” she said.

“As such, it is worth discussing how the Bank is considering the impacts of climate change on our policy mandates.”

Ms Bullock expanded on the ways the bank projects more extreme weather events will impact the economy at large.

“Hotter temperatures and more extreme weather will disrupt businesses, damage property and lower productivity growth,” she said.

However, she was adamant that actions to reduce emissions in a timely manner could reduce the economic burden of these changes.

“Indeed, while there is much uncertainty in this area, there is general agreement that a timely and orderly transition will be the less costly approach in the long run,” she said.