Call for climate to be central to RBA role

Policy experts have called for the Reserve Bank of Australia to be required to respond to climate risk to make sure it causes less chaos.

The change would put the climate response and environmental sustainability on a par with the central bank's legal responsibility to make the best decisions on interest rates and payment systems.

In a submission to a review of the central bank, the Centre for Policy Development (CPD) says a stronger climate role for the RBA would guide the shift to a net-zero economy and limit fallout for the financial system.

The first wide-ranging review of the RBA since the current monetary policy arrangements began in the 1990s is due to report back to Treasurer Jim Chalmers by March next year.

The independent think tank recommends that sustainability, climate risks and opportunities, and the financial system implications of maintaining a net-zero economy should be added to the RBA's role.

The review was called amid concern the RBA's interest rate and inflation expectations had failed to keep pace with real conditions facing households and businesses.

But financial stability can only be assured with an effective response to climate change, and the RBA should play a central role in delivering it, according to CPD policy director Toby Phillips.

"The impacts of climate change are already with us and the costs they impose on us are real and growing," he said.

Senior RBA officials have said in recent years that financial stability would be better served by an orderly change, rather than an abrupt disorderly transition to net zero.

But without a clear change of mandate, the central bank could find itself supporting emissions-intensive economic activity and increasing future costs, the submission warns.

The Treasurer is urged to issue a specific ministerial direction on climate to the RBA board so that climate and net-zero issues are part of statements on monetary policy.

Bond issuers who fail to disclose climate risk could be ruled ineligible to participate in the bank's market operations.

The submission also backs climate risk disclosure by the RBA and an expanded role for green bonds, which are used to finance projects that offer climate change and environmental benefits.

The CPD policy team has already worked closely with Treasury on developing the wellbeing budget framework, with its work cited in last month's federal budget papers.