“The European Central Bank could accompany the rise in rates with a special rate for financing environmentally friendly investments”

2023-09-11 13:30:07

The European Central Bank (ECB) continued to increase interest rates in July to combat inflation; the fastest increase in its history in one year. The debates raised by this decision are no longer limited today to the risk of economic recession.

As in many other areas, taking environmental issues into account is changing our way of conceiving monetary policy. Even if the central banks evoke more and more the ecological imperative, they have not yet fully taken the measure of the new dilemmas linked to the preservation of the environment. In particular, it is necessary that the rise in interest rates does not compromise today investments that are better for the environment, which moreover will limit the dependence of our economies on future inflationary shocks.

Double problem

The rise in interest rates could, in fact, slow down the investments necessary for the ecological transition, in renewable energies for example. A central bank that wishes to preserve price stability cannot ignore the consequences on inflation. If the price of carbon rises and there has been insufficient investment in transport, industry or agriculture to enable less carbon-intensive production, consumer prices will also rise.

For the most polluting and carbon-emitting countries, the problem is twofold: under-investing today in certain sectors, including to accompany the cessation of polluting activities, can aggravate the environmental crisis and increase the frequency of events inflationary (think, for example, of the impact of drought and fires on agriculture).

The ECB, notably through the voice of Isabel Schnabel (“ Monetary Policy Tightening and the Green Transition », Stockholm, January 10, 2023), discussed this new economic policy dilemma, recognizing that climate problems and the necessary increase in the price of fossil fuels are a potential source of inflation. However, it remains a prisoner of the idea that monetary policy can only help ecological investment if it is expansionary, that is to say that interest rates fall and the central bank buys financial securities.

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However, the Central Bank could make its policy more ecological if it accompanied the rise in interest rates with a special rate – stable or lower – for credits financing investments that are more favorable to the preservation of the environment. The Central Bank could thus allow private banks to borrow from it at a lower interest rate if they finance the energy transition.

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