SA’s monetary policy framework must “urgently” adapt to the growing risks posed by climate change as climate variability increasingly disrupts economic stability, a new working paper published by the Reserve Bank warns.
The study used an advanced economic model to simulate how climate-related events such as changes in agricultural activity, natural disasters and environmental conditions could affect SA’s key indicators such as inflation and jobs, as well as the exchange and interest rates over the next 50 years, from 2025 to 2075.
The findings revealed that climate variability “significantly influences inflation expectations and real economic output in SA”.
According to authors Admire Tarisirayi Chirume, James Hurungo and Brandon Aaron Chinoperekweyi, shocks such as droughts, floods and erratic rainfall patterns would raise production costs — especially in the agriculture sector — triggering cost-push inflation. This would compel the Bank to adjust interest rates to anchor inflation within its 3%-6% target band.
The report highlights a “delicate trade-off”, because raising rates to combat inflation may dampen economic growth and worsen unemployment, particularly when climate shocks are prolonged or severe.
Beyond inflation, climate variability is also linked to heightened volatility in employment and exchange rates. The authors cautioned “traditional monetary policy tools might be insufficient or less effective if climate risks are not integrated into the decision-making process”.
They write: “The simulations also underscore the uncertainties surrounding these outcomes, emphasising that climate-induced shocks can lead to complex, non-linear economic responses.
“Such fluctuations necessitate a responsive and flexible policy approach that not only targets price stability but also enhances resilience against climate variability.”
The study recommends that the central bank adopts climate-informed interest rate policies, supported by forecasts and stress-testing scenarios, enabling it to better anticipate inflationary or deflationary pressures driven by environmental factors.
It also urges the establishment of a climate risk monitoring system and a more flexible inflation targeting framework that can better accommodate temporary climate shocks without overreacting.
Notably, the simulations reveal that total output, consumption and investment all decline under climate stress, while unemployment increases and inflation becomes more volatile. These findings align with broader literature suggesting climate shocks can trigger persistent downturns in output and job creation.
“However, in some studies ... the results suggest that with well-calibrated climate policy interventions, the negative effects on investment could be mitigated or even reversed, highlighting the role of policy as a buffer against climate shocks,” the authors write.
Monetary policy alone cannot carry the burden, they argue. Complementary fiscal and sector-specific measures, such as investment in climate-resilient infrastructure and sustainable agriculture, are essential.
“Integrating climate risks into macroeconomic planning and adopting resilient policy measures are pivotal for safeguarding economic stability in the face of escalating climate challenges,” the study reads.
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