Bank of England warns physical climate shocks raise inflation and output risks

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Bank of England climate risk warning

Highlights

Bank of England's James Talbot warns physical climate shocks now cause over $200 billion in annual global damages, more than double early 2000s levels.
Research shows 30 days of low water on Germany's Rhine River reduces industrial production by about 1%, highlighting climate disruption's inflation and output risks.
October 2024 Valencia floods caused losses exceeding 20% of regional GDP, with over 250,000 insurance claims and more than 4 billion euros paid by late 2025.

Monetary policy focus on climate shocks

As reported by the Bank of England, James Talbot, the central bank's Executive Director for International, says physical climate shocks are becoming larger and more proximate, with short-term economic effects also increasing. He says annual global damages from weather-related events have more than doubled since the early 2000s, reaching more than $200 billion in 2025.

Talbot says these effects matter directly for central banks when extreme weather disrupts production, output and inflation, because that affects their primary goal of maintaining price stability. He adds that central banks need to assess both the near-term monetary policy effects of climate shocks and the longer-term contribution of resilience measures.

He points to Germany's River Rhine as an example of how climate-related disruption feeds into industry. Lower summer water levels reduce cargo loads on ships, interrupt goods movements and raise transport costs; research cited in the speech estimates that 30 days of low water on the Rhine reduces German industrial production by about 1%.

Insurance and resilience shape economic impact

Talbot also highlights the October 2024 flash floods in Valencia, which caused economic losses worth more than 20% of regional GDP and reduced Spanish fourth-quarter GDP growth by between 0.1 and 0.2 percentage points. He says the impact would have been larger without strong insurance protection for households and businesses.

Around 250,000 insurance claims were filed after the Valencia floods, and Spain's Insurance Compensation Consortium had paid more than 4 billion euros in compensation by late 2025, making it the largest event the scheme has ever handled. Talbot uses that case to argue that adaptation and insurance help economies absorb shocks and preserve price and financial stability.

He adds that even economies such as the UK, which may be less exposed to large domestic physical shocks, can still be affected by events abroad. Over the past four years, he says he has worked with more than 60 central banks through the NGFS monetary policy workstream to develop a framework for measuring climate impacts on the economy and deciding how policymakers should respond.

In our earlier article on Malaysia’s call to strengthen fiscal buffers against global shocks, we discussed how recurring disruptions — including climate shocks — are pushing governments to plan for crises as a standard part of budgeting. We noted warnings that higher-for-longer interest rates and rigid spending structures can limit policy space, making measures such as broadening the tax base and refining subsidies important for resilience.

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