ECB must intensify efforts for “green” monetary policy, says official

The European Central Bank needs to adjust its monetary policy to make it more conducive to tackling climate change, even as it trims its balance sheet to curb high inflation in the euro zone, ECB Governing Council member Isabel Schnabel said on Tuesday ( 10).

The ECB has sought to support the economy’s green transition, but an unexpected rise in inflation along with rising interest rates has posed an obstacle to sustainable development, requiring a new approach, argued Schnabel.

The central bank intended to adjust its corporate bond portfolio towards greener assets through further purchases, but bond buying has stalled and not even all maturing bonds will be reinvested, so the ECB’s efforts have lost much of their impact, he said. Schnabel, head of market operations at the ECB.

“So we need to move from a flow-based to an equity-based tilting approach to our corporate bond portfolio,” she said at an event organized by the Swedish central bank in Stockholm. “This means that, in the absence of any reinvestment, active portfolio reshuffling towards greener issuers will need to be considered.”

The ECB also needs to rethink how it leans on public sector bonds, which make up half of its €8 trillion balance sheet.

She cited two options: buy more bonds from international agencies, or reshuffle government bonds in favor of more sustainable bonds, as states expand their supply of green bonds — debt issued to finance green projects — over time.

But Schnabel rejected the argument that higher interest rates are actually impeding the green transition by making investments more expensive.

She said the ECB’s inaction now will force the bank to take more aggressive action later, at greater cost to both the broader economy and climate-friendly sectors.

“Failing to stop high inflation in a timely manner will jeopardize the green transition more significantly,” he said.