- Climate change could disrupt how the RBA considers the cash rate
- The energy transition might boost energy prices, thereby driving inflation upwards
- Severe weather events could hamper supply chains and decimate employment
- Climate change could reduce the value of 7.5% of properties by as much as 5%
More frequent extreme weather events; gradual changes to temperatures, rainfall, and sea level; and risks arising from actions taken to address climate change will likely see Australia's central bank wading through “particularly acute” uncertainty, incoming RBA governor Michele Bullock (pictured above) said.
“Hotter temperatures and more extreme weather will disrupt businesses, damage property and lower productivity growth,” she said on Tuesday evening as she delivered the Sir Leslie Melville Lecture at the Australian National University.
“Actions taken to reduce emissions may present adjustment costs, but they will also present opportunities.”
The RBA has held the nation’s cash rate at 4.1% for two consecutive meetings now in its quest to reduce underlying inflation to its target of between 2% and 3%.
The central bank’s board will meet once more on Tuesday, where rates are expected to be held steady once more.
Ms Bullock will take the RBA’s reins from her predecessor Philip Lowe on 18 September.
The price of going green
The transition to a low- or zero-emissions economy could bring about a surge in energy prices, Ms Bullock warned.
Spending on gas and electricity make up around 3% of the ‘basket of goods’ used to assess the consumer price index (CPI) – Australia’s inflation measurement.
Inflation ran rampant in 2022, leading the RBA to embark on its greatest and most elongated tightening cycle on record.
“How the transition plays out for energy prices is going to be an important consideration for monetary policy over coming years,” the incoming RBA governor said.
Energy prices could jump in response to the transition to cleaner electricity generation, thereby increasing household spending and bolstering inflation.
On the other hand, faster-than-expected improvements in renewable energy technology could force energy prices down sooner than anticipated.
‘No pain, no gain’ is arguably the case put forward by those championing emissions reduction measures, as rampant climate change is expected to produce its own challenges.
“Mitigating climate change by putting in place policies to reduce emissions will impact the prices faced by households and businesses," Ms Bullock said.
“This will lead to structural shifts in output and employment as some carbon-intensive economic activities become unprofitable and others eventually take their place.
“How smoothly these changes occur will be important context for monetary policy.”
A case of supply and demand
Many of the physical effects of climate change may be treated (on a monetary policy basis) as supply shocks – like how banana prices previously surged in the wake of cyclones in Queensland.
Though, the shifting climate could more permanently impact the production of many more consumables.
At the same time, extreme weather events could disrupt demand – reducing spending in the economy for a time.
Extreme weather would also likely destroy workplaces, dragging unemployment upwards, while rising temperatures could impact workers’ health, reducing productivity.
The RBA has previously indicated it expects 4.5% to be a non-inflationary unemployment rate. Unemployment rose to 3.7% in July.
“Unemployment could be persistently higher if people are unable or unwilling to leave a region that has suffered from extreme weather and related job losses,” Ms Bullock said.
“Climate impacts vary significantly across regions – an impact may be small in aggregate, but extreme for a local community.”
She also noted that over a third of Australia’s exports are fossil fuels – demand for which could soon tumble.
However, the country stands to benefit from the production of minerals critical to the low-emission economy, such as cobalt, lead, lithium, and nickel.
7.5% of homes could see values tumble due to climate change: RBA
Finally, RBA analysis found that 7.5% of Aussie properties are located in postcodes that could see prices plummet due to climate change.
Those post codes, encompassing much of Australia’s eastern and western coasts, could see house prices by as much as 5% by 2050.
“To capture the physical climate risks to residential housing, climate hazard data were used to measure the expected increase in insurance costs due to climate-related damage – such as more frequent flooding and more damaging cyclones – which were translated into housing price falls,” Ms Bullock said.
It could also weigh on lenders providing home loans to said owners, though not to a worrying degree.
“The CVA [Climate Vulnerability Assessment] results showed that losses on bank lending would increase in the medium-to-long term in both scenarios, but this would not cause severe stress,” she said.
“Do these results mean that we do not need to worry about the impact of climate change on financial stability? Unfortunately, no."