Monetary Policy

Decisions on interest rates, balance sheets and financial supervision shape capital allocation, wealth distribution, financial resilience and economic development. We engage with central banks and financial regulators on their critical contribution to long-term prosperity through monetary policy and their oversight of the financial system.

MONETARY POLICY

Few instruments reach as broadly across an economy as monetary policy. Through interest rates and the management of their balance sheets, central banks influence the cost of credit, the value of assets and, ultimately, the allocation of capital and distribution of wealth. In recent years their toolkit has expanded well beyond conventional rate-setting – large-scale asset purchases and expanded balance sheets have become standard features of the policy landscape, with consequences that extend far beyond price stability.

In that context, central banks worldwide have started accounting for their role in addressing climate and environmental risks to the financial system. The reflection of climate criteria in the corporate bond purchases of the European Central Bank, and the integration of a climate factor in its collateral framework are cases in point. The launch of a targeted refinancing operation by the Bank of Japan in support of climate action offers an additional example.

CEP is building on these developments to further align monetary policy with climate and environmental objectives, and to move distributional considerations up the agenda of monetary policymakers. We also work on the need for growing fiscal-monetary coordination as well as the important role of central banks in the digitalization of money – in particular through central bank digital currencies and stablecoins.

Examples of our activities in the field include engagements on the integration of climate considerations into the management of the balance sheet of the Bank of Japan, the potential contribution of targeted refinancing to Asia’s energy future, and the implications of climate-related supply shocks for inflation-targeting frameworks. We have also started zooming in on the role of central banks in addressing long-term structural transformations, including the digitalization of finance, population aging, and technological change.

PRUDENTIAL SUPERVISION

A resilient financial system is a precondition for sustained economic development. Prudential supervision sits at the core of that. Microprudential oversight safeguards the soundness of individual financial institutions. Macroprudential policy guards against the build-up of risks across the system as a whole. Through capital requirements, borrower-based measures and further instruments, regulators and supervisors work to prevent failures and build resilience.

Their task is being reshaped by novel risks that existing frameworks were not designed to capture. Climate-related financial risk, the rapid growth of non-bank intermediaries, the spread of stablecoins and other digital assets, and the use of artificial intelligence in finance, all test the reach of current rules. Adapting supervision to these risks, without choking off credit and innovation, is central to both financial stability and economic development.

CEP engages with financial regulators and supervisors on strengthening prudential frameworks for novel risks, building resilience, and ensuring their alignment with policy priorities.

Our current work spans the recalibration of capital requirements and the use of macroprudential policy to account for climate risks, as well as the role of financial regulation and supervision in expanding access to green finance for small firms. Examples include joint engagements with the ASEAN+3 Macroeconomic Research Office (AMRO) and the Banco de Portugal on novel risks and macroprudential capital buffers, as well as analysis of the use of macroprudential policy for a low-carbon economy and data platforms for inclusive green finance in China.