NGFS publishes report on acute physical impacts from climate change and monetary policy

This NGFS (Network for Greening the Financial System) report explores how acute physical hazards driven by climate change, such as floods, heatwaves, and storms, affect macroeconomic stability and influence monetary policy decisions. As extreme weather events become more intense and frequent, they cause growing economic damage, disrupt supply and demand channels, and strain financial systems. The study provides a framework for central banks to better understand and incorporate climate risk into their monetary policy tools, focusing on the complex interaction between environmental shocks and key economic variables like GDP, inflation, asset prices, and public finance.

The report finds that severe weather events have widespread economic effects beyond immediate physical destruction. These shocks depress GDP growth, raise inflation primarily through food prices, damage infrastructure, and impair labor productivity, especially in vulnerable sectors like agriculture. Insurance coverage gaps and fiscal burdens from disaster recovery slow economic resilience and delay recovery. Evidence from countries like Egypt, the United States, and Pakistan shows that inadequate adaptation worsens outcomes. The report emphasizes the urgent need for climate adaptation, disaster risk reduction, and financial preparedness to cushion the macroeconomic consequences of climate change and maintain monetary stability. It concludes that climate risks must become a core focus in economic planning and central banking.