ECB rate hikes could derail climate investments, MEP warns

The European Central Bank’s (ECB) decision to increase interest rates to fight inflation could impede investments in green energy, EU lawmaker Rasmus Andresen warned, calling on the bank to differentiate its interest rates.

The ECB will “stay on course” and further hike interest rates for as long as eurozone inflation is above the target of 2%, ECB president Christine Lagarde said at a panel discussion at the World Economic Forum in Davos on Thursday (19 January).

However, some policymakers are concerned that this could endanger the long-term solution to the energy crisis, notably investments in energy efficiency and clean energy.

“We are facing inflation caused by supply shocks in the energy sector,” Green MEP Andresen told EURACTIV.

“The best way to solve this problem is not central bank policy, not aggressive interest rate policy, but to solve the dependency on fossil fuels in the long run,” he said.

Andresen, who is the European Parliament’s chief negotiator for its yearly resolution on the ECB’s monetary policy, calls on the central bank to “differentiate” its interest rates, allowing green investments to benefit from lower rates in order to prevent increasing their capital costs.

“There are economic sectors where we do not need a dampening of growth, but where we actually need more activity,” Andresen said.

“Against this backdrop, we believe that a more differentiated action, also with regard to interest rates, can contribute to this”, he added.

This is supported by NGO Positive Money, which argues that higher interest rates have a particular effect on green investments.

“Green energy projects are more capital intensive as they require larger upfront investments,” a briefing by the NGO shared with policymakers reads. “The green energy industry is therefore more sensitive to higher costs of capital than traditional industries,” it said.

By offering lower rates on its refinancing operations when banks extend loans for investments in energy efficiency or renewable energy, the ECB could “reconcile its price stability mandate with the EU’s environmental and economic objectives”, the NGO continued.

MEPs to discuss the ECB’s climate strategy

On Monday (23 January), group negotiators in the European Parliament’s Committee on Economic and Monetary Affairs will discuss their position on the ECB’s strategy towards climate change ahead of the adoption of the parliament’s annual resolution on the ECB monetary policy.

“We will not only talk about this proposal but also about the climate issue as a whole, so the ECB’s responsibility to comply with the Paris climate targets,” Andresen said.

While Andresen hopes the proposal of differentiated interest rates will be included in the parliamentary resolution, he admitted that opposition from liberal and conservative groups in the chamber will make this difficult. 

“Inflation is way too high and it is the ECB’s main and only job to bring it down, especially taking into account that core inflation has recently become the major contributor to the headline inflation,” conservative lawmaker Fulvio Martusciello told EURACTIV.

“Just as the ECB does not target individual inflation rates at member state level, it also does not discriminate between asset classes,” Martusciello, who heads the Italian delegation within the European People’s Party group (EPP), said.

“As confirmed by President Lagarde during our last Monetary Dialogue the issue of differentiated rates is not what ECB would entertain,” Martusciello concluded.

“Hands-off credit policy,” expert says

Experts, too, caution against the idea to differentiate interest rates, thus treating banks differently depending on what credits they are granting to companies.

“Now, all banks have the same interest rate” under the ECB’s main refinancing operations, Michael Bauer, professor of Financial Economics at Hamburg University, told EURACTIV.

“To charge different interest rates for different banks there would of course be a radical change, a fundamentally different system than now,” he said, adding that this would carry “considerable risks”.

“I think the consensus is that central banks should keep their hands-off credit policy,” he said. “It’s too complex, too difficult, too risky. And the ECB has no mandate for that,” Bauer said.

He also questions the impact that such a proposal would have.

“Generally speaking, I don’t believe that half a percentage point lower interest rates would make a huge difference for the green transition,” Bauer said. “This is a long-term issue, and we will only get on the right track if we get inflation under control again,” he added.

Focus on corporate bonds

Nevertheless, Bauer also says that considering the climate footprint of the ECB is part of its mandate.

“There is a treaty obligation to support economic policy goals, including those of climate change mitigation and transition,” he said.

In Bauer’s view, the ECB should thereby focus on corporate bonds, which the central bank buys as part of its ‘unconventional’ monetary policy.

As companies with the highest emissions issue more bonds, just “buying what is sold, what is on the market” would automatically lead to a “brown footprint”, which would not be in line with the secondary mandate, Bauer said.

The ECB has already taken steps to address this problem.

“We are now tilting our corporate bond portfolio towards issuers with better climate scores, with a view to removing the existing bias towards emission-intensive firms,” the ECB’s executive board member Isabel Schnabel said at a symposium on 10 January in Stockholm, Sweden.

However, as the ECB will reduce the bonds it holds on its balance sheet as part of its efforts to combat inflation, only using climate indicators when it comes to replacing maturing bonds with new ones might not be sufficient anymore, Schnabel argued.

Therefore, “absent any reinvestments, actively reshuffling the portfolio towards greener issuers would need to be considered,” Schnabel said.

“That means that in the case of corporate bonds, [the ECB] is now considering selling those of companies that are particularly brown,” Bauer explained.

This, too, had risks of market distortion, he said, but “in practice, this is much easier to do” than differentiating interest rates for corporate banks depending on their business model.

[Edited by Nathalie Weatherald/János Allenbach-Ammann]