5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  The changes adopted by many central banks around the world in the late 1990s effectively narrowed their focus, reflecting the belief that price stability was the best contribution a central bank could make to macroeconomic stability, and by extension to the broader public good. Although there were tremendous innovations during this period, this reductionist vision of a central bank’s role was structurally flawed. In particular, this narrow focus failed to recognise that financial stability is as important an objective of macroeconomic policy as price stability. Central banks have a vital role in maintaining financial stability because of the deep underlying connection between it and monetary stability. Both are fundamentally about maintaining the public trust and confidence in money and the financial intermediation that is essential to oil the wheels of commerce. That trust and confidence can be undermined through a loss of certainty about the future value of money, a loss of confidence in financial intermediaries, or ultimately a loss of faith in the financial system. The financial crisis was a powerful reminder of the imperative of financial stability. After years of low and stable inflation, it became obvious that central banks had won the war only to lose the peace. The costs were enormous. The complete loss of confidence in private finance that occurred in 2008 could only be arrested by public support that totalled $ trillion in bail-outs, government guarantees of bank liabilities and special central bank liquidity schemes.
The catastrophic impacts of climate change will be felt beyond the traditional horizons of most banks, investors and financial policymakers, imposing costs on future generations that the current one has no direct incentives to fix. Once climate change becomes a clear and present danger to financial stability it could already be too late to stabilise the atmosphere at two degrees. The longer adjustment is delayed, the more GDP-at-risk will grow. Catastrophic physical risks from the increased frequency and severity of climate and weather-related events will likely increase non-linearly. 30  All speeches are available online at www.bankofengland.co.uk/news/speeches  30  And late climate policy action could bring about a climate ‘Minsky moment’ when the scale of stranded assets dawns, bringing about sudden and sharp adjustments to asset prices. These risks to financial stability will be minimised if the transition begins now and follows a predictable path, thereby helping the market anticipate the transition to net zero and reducing the costs of adjustment. The policymaker’s discount rate is important to their assessment of the financial stability risks of climate change. 𝑇  min ℒ𝑡 ≡ 𝐸𝑡 {∑ 𝛽 𝑖 [𝑓(𝐺@𝑅𝑡+𝑖 ) − 𝜙𝑦𝑡+𝑖 ]} 𝜌𝑡  𝑖=0  Last year, the Government brought the horizon consistent with Parliament’s declaration of a climate emergency and the legislation of a UK Net Zero target for 2050.