Impact of rate hikes on the green transition

Isabel Schnabel, Member of the Executive Board of the ECB, made a speech at the International Symposium on Central Bank Independence in Stockholm regarding the impact of higher interest rates in the decarbonization of our economies. She considers that price stability and contained inflation (2% medium-term ECB´s target) is a precondition for the sustainable transformation of our economy.

Main takeaways:

• It would be misleading to use higher interest rates as a scapegoat for a further delay in the green transition: Higher interest rates will make the financing of renewable energies and green technologies more expensive, but they are needed to contain inflation and to provide price stability which is a precondition for the sustainable transformation of our economy for two main reasons:
• Restoring price stability in a timely manner provides the conditions under which the green transition can thrive sustainably. High inflation is a tax on investment raising the cost of capital taken for investment decisions.
• The largest barrier to a rapid decarbonisation remains the lack of progress by governments in implementing prior climate commitments: many governments failed to use the past years of low interest rates to accelerate investments to greening the economy. Governments must end the reliance on fossil fuels as quickly as possible.
• Governments must remain in the lead in accelerating the green transition. By promoting green technologies and renewable energies, they will enhance the productive capacity of the economy and thereby help restore price stability over the medium term
• A green Capital Markets Union is needed to foster the green transition: EU equity markets remain fragmented and often illiquid. Reliance on bank lending at a time of rising constraints on banks’ balance sheets considerably reduces the set of options for firms to push ahead with their green agenda
• Current interest rates are not affecting green investments flows:  as measures of real long-term interest rates, for example, which matter most for green investments, remain low in historical comparison and there is also no evidence of funding shortages for green investment projects, even ESG equity funds have even seen sustained inflows.