This proposal seeks to equip central banks with mandates and policy toolkits capable of addressing major social and ecological challenges that threaten macroeconomic stability and human wellbeing. Engaging with such challenges is currently often regarded as outside of central bank mandates focused narrowly on price stability, and in breach of ‘market neutrality’. Ecological breakdown and geopolitical conflicts, however, are increasingly driving supply-side price shocks and financial instability. Legal mandate changes can extend financial system stability objectives which facilitate a broader view of medium- to long-term macroeconomic risks (such as ecological breakdown and widening inequality), and add debt management objectives which encourage lower interest rates to support the large-scale public investment needed to address major social and ecological challenges. Governments can guide central banks on key social and ecological objectives and set more ‘adaptive’ inflation targets which reduce dependence on monetary tightening that drives social harms and raises the cost of green investment. Central banks can provide credit guidance through instruments including qualitative/quantitative credit quotas, dual interest rates, refinancing schemes, collateral framework exclusions and haircuts, and capital requirements. The People’s Bank of China’s Carbon Emission Reduction Facility has supported financial institutions to extend over USD 150 billion of low-cost financing to green projects. The European Central Bank has mandated banks to disclose ecological risks and enforced fines for non-compliance. And the central banks of Bangladesh, Sri Lanka, Vanuatu, Fiji, and the Philippines have operated refinancing facilities for post-disaster reconstruction. Institutional frameworks for stronger democratic guidance of central bank policymaking should also be established, such as ‘credit councils’ and ‘preferred asset taxonomies’. Together, these various mechanisms would support medium- to long-term transformation towards equitable and sustainable economies by guiding financial flows away from destructive activities and in support of social and ecological objectives. The policy can re-empower central banking for public good to counteract the oversized influence of private finance in shaping economies around profit maximisation and endless economic growth. Further, abstract support for economic growth can be removed from central bank mandates to weaken the growth imperative and re-centre human wellbeing.
