Why Climate Disasters Present a Central Bank Dilemma

Weather-related disasters hit economies from two opposing directions: they reduce output while driving up inflation. This simultaneous supply disruption and price pressure creates a classic dilemma for monetary policy, where raising rates to control inflation risks exacerbating the slowdown in output. Using a structural model, the Bank of Canada evaluated how the rising frequency and severity of physical climate disasters could intensify these trade-offs for future policy decisions.