Or, as American economist Michael Woodford put it: “Because the key decision-makers in an economy are forward-looking, central banks affect the economy as much through their influence on expectations as through any direct, mechanical effects of central bank trading in the market for overnight cash.”1 In this context, the impact of monetary policy relies even less on short-term money market rates and much more on expectations regarding the future course of key interest rates and, above all, long-term interest rates.
Transition risks materialise when a company with a carbon-intensive business model is unable to adjust quickly enough to new policies, competing technology, or changing customer preferences. Investors may also need to adjust their portfolios, leading to financial losses. Such losses are amplified if all investors act simultaneously.