Bank of England handed ‘green remit’ to aid net-zero target

For many years, the Bank of England’s Monetary Policy Committee had a simple task – to make sure inflation didn’t stray from a set target. Now, it has been tasked with helping meet a green target too.

Since the Bank of England (BoE) was given independence in setting monetary policy in 1997, the Monetary Policy Committee (MPC) has been responsible for moving interest rates, a pivotal moment which allowed its actions to be completely free from political influence. Over the years, it has been targeting an optimal rate of inflation equivalent to two per cent on an annual basis.

If the economy got too overheated and inflation rose, the MPC would intervene to hike rates. If it underperformed, and inflation disappointed to the downsides, rates would fall. But what about the temperature of the planet at large?

Now, the MPC has had its remit enlarged by Chancellor Rishi Sunak, to include the importance of sustainability and achieving an economy which is net-zero carbon.

It starts with bonds

As reported previously, the government has unveiled some of the world’s first sovereign green bonds – issuance of debt by the government, available for purchase by investors, intended to help the government fund projects related to green infrastructure.

Under current plans, the UK Government will issue £15 billion of these green bonds. The BoE is no stranger to buying up bonds itself – in the past year, the BoE has purchased billions of pounds in government bonds through a policy called quantitative easing, to keep the cost of servicing government debt low.

The BoE has a balance sheet which can hold all sorts of assets, so the entrenchment of a green remit could mean the central bank might think more carefully about the types of corporate bonds it may decide to purchase, for example. It may choose to target bond buying to benefit industries doing their bit to decarbonise the economy, which could bring about a sea-change in corporate bond buying behaviours elsewhere.

A post-cash world

Central banks have played their own role in affecting the environment. In more recent years, the BoE has started to embrace the use of polymer bank notes to reduce its carbon footprint, having previously been responsible for issuing paper banknotes and coinage, as it had done for centuries.

The COVID-19 pandemic has accelerated another trend when it comes to our money – the shift towards a cashless society is gathering pace. We are getting increasingly used to making large payments in which less money changes hands, but is instead beamed from our cards straight into bank accounts.

We have seen how the likes of Bitcoin have revolutionised the way markets work, but critics have been concerned about the cryptocurrency’s insatiable demand for electricity. Even so, the transition to a more digital economy could mean less demand for raw materials such as the paper, metals and polymer needed to produce physical cash on an annual basis.

The 2021 Budget gives the BoE significant responsibilities, not just to monitor the UK’s overall economic health and adjust interest rates accordingly – it will be tasked to help deliver a zero-carbon future, and it possesses the monetary clout to move markets already. It’s just a matter of putting its money where its mouth is.

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