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Joe Hornyak
Former editor of Benefits and Pensions Monitor and founder of Joe Hornyak Communications
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Threat Becomes More Urgent
Global standards setters have made progress on addressing climate-related financial risks, but that threat has only become more urgent, says the Financial Stability Board (FSB). Its first annual progress report on the roadmap for dealing with climate-related financial risks concludes that there has been progress in key areas, including improving the quality and utility of climate data, developing disclosure standards, and crafting supervisory tools. However, policy action to address climate-related financial risks is “more urgent than ever.” The increased frequency and intensity of extreme weather and climate-related events and the intense debate about current and future energy policies in many jurisdictions, highlight that financial risks related to climate change, including transition risks, are not just a long-term issue or tail event,” it says. The FSB stressed the need for continued progress on adopting effective risk management practices, building the financial system’s resilience to climate-related risks, and close co-ordination among countries to ensure effective action.
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Global Outlook Deteriorates
The global economic outlook deteriorated sharply in the second quarter, says AllianceBernstein’s ‘2022 Economic Outlook.’ It notes that inflation remains persistent in the west, with few signs that meaningful moderation is imminent. This gives central bankers no choice but to respond with aggressively tighter monetary policy. The U.S. Fed has raised rates by 150 basis points (bps), the Bank of England by 125 bps, and the European Central Bank is set to start a tightening cycle next month. Central banks from Australia to Canada and emerging markets (EM) have also tightened policy to fight inflation and expectations for more have ratcheted up as well. Tighter monetary policy means slower growth as growth typically feels the impact of tighter policy before inflation does. Not surprisingly, financial markets are increasingly concerned that higher rates will lead to a recession because central banks aren’t in a position to respond to slower growth until inflation eases. While this outcome isn’t a certainty, the probability of meaningfully slower, or even negative growth, has increased materially in recent months as inflation has stayed high. Complicating the issue is the reality that many of the forces pushing prices higher are beyond the control of monetary policy, it says. For example, supply chain disruptions remain impactful as the global economy struggles to reboot from COVID-19 shutdowns. Higher commodity prices, too, driven both by supply disruptions and the war in Ukraine, have exacerbated inflation pressures. Central banks can’t heal the supply chain or end the war through rate hikes and balance-sheet reduction. All that they can do is to bring demand down toward current supply levels.
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