Climate change and central banking: macroeconomic challenges and evidence from Africa

Torsten Ehlers, Leonardo Gambacorta and Livia Pancotto

No 169 in BIS Papers from Bank for International Settlements

Abstract: Climate change is an important source of macroeconomic risk with direct implications for monetary policy and financial stability. Physical risks, including more frequent and severe weather events, disrupt production and damage infrastructure, generating supply and demand side pressures that affect output and inflation. Transition risks arising from climate policy, technological and market shifts can tighten financial conditions and alter relative prices, creating short-term adjustment costs, while influencing long-term growth prospects. These dynamics are particularly relevant in African economies, where climate shocks propagate rapidly through food and energy channels, reflecting greater sectoral exposure and more limited fiscal and insurance buffers. Drawing on simulations from the BIS-Multisector (BIS-MS) model and global evidence on weather disasters, this paper shows that climate-related shocks generate heterogeneous macroeconomic effects within policy-relevant horizons. Economies more exposed to energy-intensive and agricultural sectors – including several African countries – experience stronger inflationary pressures, deeper output contractions and larger policy rate adjustments. These findings highlight the importance of strengthening data and modelling frameworks to better account for climate-related risks in monetary policy and financial stability analysis.

Date: 2026 Written 2026-04
ISBN: 978-92-9259-946-1
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