Soaring energy costs, climate change and tensions in the Middle East topped the agenda at a corporate lunch organised by the British-Portuguese Chamber of Commerce BPCC) on Friday which was hosted by the British ambassador, Lisa Bandari at the ambassador’s residence.
In her keynote speech, the guest speaker, the Vice-Governor of the Bank of Portugal (BdP), Clara Raposo, said that Portugal, in line with other European Union countries, had a two-fold challenge: to mobilise domestic and international investment at scale, and ensure that financial systems remained stable, resilient, deep and efficient.
“Energy costs are particularly relevant, and despite some stabilisation, electricity prices in Europe remain significantly higher, sometimes twice as high, than in the United States. The transition to a low-carbon economy is consequently an opportunity to improve resilience to these external shocks”, said Dr. Raposo who shares the vice governorship at the BdP with Luís Maximo dos Santos.
Maintaining confidence in the financial system
The Vice Governor said the Bank of Portugal’s task was to ensure that citizens and businesses could have confidence in the financial system, and that financing was being properly allocated from banks and other types of funding that are more able to take the risks that banks cannot or should not take given their regulated nature.
But there was no room for complacence on energy transition away from oil and gas towards more renewable and cleaner sources of renewable energy.
“Given the current geopolitical turmoil perhaps at some point we will want to say, “Why am I worrying about climate (change) right now when I have a war in the Middle East, and that’s what we should be focusing on.”
Perhaps we should be worrying about “how to get cheaper energy from somewhere else and finding and striking a deal with someone that can get this cheaper, so let’s forget about climate now,” she said in what could have been a nod to fuel tankers heading away from the troubled Strait of Hormuz and the Gulf States towards Houston, US, in a bid to secure alternative supplies.
But pointed out that the fact that the world has had geopolitical tensions over energy in recent years because of power plays didn’t overshadow the acrimony shown to Europe precisely because Europe had taken steps over climate change and energy transition by investing in different forms of energy instead of solely relying on countries that had cornered the market in other parts of the globe. (Namely oil and gas producing countries)
Resilience in the face of climate change
And Clara Raposo, who had been an economist lecturer at the Lisbon Business School of Economics and Management – ISEG before her current role at the BdP, reminded that it was because of climate change that the world was facing energy shocks and the current geopolitical tensions.
“Climate change is here and we need to solve this threat and have sufficient resilience to go through the investment we need to make to deal with this. Monetary policy, financial stability, sustainable finance are all increasingly intertwined” said the economist.
“We face complex challenges marked by this persistent uncertainty; all these profound structural changes, vulnerability to external shocks where in this environment our institutions and the frameworks we develop must be robust and forward-looking.
We cannot be stopped by short-term difficulty. Companies must look beyond the immediate horizon, investing in strategies that remain effective across different scenarios while strengthening their resilience”, she stressed.
Looking beyond tomorrow
It was a war that Portugal and Europe was fighting on various fronts, and financial systems had to adapt to emerging risks and opportunities, ensuring that risk was properly understood and appropriately priced.
And added, “Central banks must remain focused on their mission. They are uniquely positioned to contribute to stability, not because they eliminate shocks, but because they know how to look beyond tomorrow”, stressed the central bank vice president.
The long-term perspective was one of the defining strengths of central banking. It allowed a connection between present policy decisions and long-term outcomes to look beyond short-term volatility and support the (energy) transition that was not only necessary but also orderly, credible, and economically sound. At the same time, policymakers needed to create the conditions for a transition that was orderly, inclusive, and economically viable.
“Portugal and Great Britain, through institutions such as the British Portuguese Chamber of Commerce, of course, and the Bank of Portugal, have an important role also to play in this process.
By strengthening cooperation, encouraging well-informed investment in innovation, we can contribute to a European economy that is more resilient, more competitive, and more sustainable. The challenges we face are significant, but so are the opportunities”, Clara Raposo said on a positive note.
Long-lasting effects
It was, she stressed, a consequential moment as a time for transformation in the global economy, and this meant that “strengthening dialogue between our countries”, and more broadly across Europe of course, had become “increasingly important”.
And it was not just a question of if these volatile energy prices were temporary. The one-time Oxford university lecturer said the effects of the current crisis “will be long lasting”.
They shaped the environment in which governments operated, monetary policy was conducted, financial systems functioned, and investment decisions made.
“We must look beyond the short term, and that’s the important message that I would like to share. So at the same time, all these developments provide a strong incentive, but also an opportunity to accelerate Europe’s transition towards a more resilient, sustainable, and competitive economic model.”
Assessing climate-related risks
Another of the key themes in Clara Raposo’s address was the evolving role of the central banks, in assessing structural and climate-related risks. The development of sustainable finance and capital allocation, and also the implications for competitiveness investment and financial resilience for the European Union, but also for the UK.
On monetary policy, the economist said that the central banks of the developed economies had “undergone a necessary phase of monetary policy normalisation” and this had happened following “a period of highly accommodative conditions”.
An excess liquidity environment
The economist recalled the Great Financial Crisis over a decade ago when Portugal had suffered the sovereign debt and banking crises with several banks, including large ones, running into difficulties and failures.
“Central banks, like the European Central Bank, the Bank of England, and the Federal Reserve Bank in the US changed the way in which monetary policy was conducted”, Clara Raposo recalled.
“Instead of simply going to the usual instruments, which is changing the interest rates, because interest rates affect everyone in the economy as money becomes cheaper or more expensive, we started buying financial assets ourselves (such as sovereign bonds) for the portfolios of the central banks.
By so doing, that had been a way of injecting liquidity in the system since banks were not able at the time to do this as they didn’t have enough liquidity. Central banks supported the economies throughout the world by injecting a lot of liquidity in the system. We still have what we call an excess liquidity environment today”, she explained.
Despite the Ukraine war causing some inflation, there was a process of normalisation as central banks stopped buying up financial assets from the market (sovereign debt in the form of treasuries), selling the bonds.
This shift in monetary policy had been driven by inflationary pressures and was linked to supply disruptions (oil and gas).
“When we have these shocks, we know they raise headline inflation, they increase production costs, they erode household purchasing power, and ultimately weaken growth”, she said.
These remedies were nothing new but the key lesson was simple; the persistence of inflation following an energy shock depends critically on the credibility of monetary policy. “So in the current cycle, so far, this credibility has been preserved”.
And inflation expectations had remained broadly anchored, reflecting stronger institutional frameworks and decisive policy action.
Credibility preserved
Both in the Euro area and in the UK, medium-term inflation expectations remain anchored around the medium-term targets that the central banks established of 2%. And even if the short-term expectations, particularly in the UK, inflation is currently elevated (3.3-3.4%), there had to be clarity about the limits of monetary policy.
“Energy shocks tend to be negative supply shocks, and central banks cannot increase the availability of oil or gas, nor can they offset their real economic cost. What central banks can and must do is ensure that such shocks do not translate into persistent inflation, particularly through second-round effects on wages and expectations of economic agents. So, in practice, this means that initial energy price shocks may be assessed as temporary”.
However, if there were signs that inflation was becoming more broad-based and persistent, then monetary policy had to be ready to respond decisively to avoid bank runs.
“The problem is that the policy is the same but the situation has changed. In particular, climate change, and more specifically, climate-related financial risk, has actually become a structural factor that can no longer be overlooked”, said Clara Raposo.
Climate-related developments matter, she said, to the extent that they are shaping inflation dynamics, economic activity, and financial stability.
Taking responsibility
First, the physical risks associated with extreme weather events like the storms Portugal suffered in January and February means that families and businesses have to bear more responsibility for having adequate insurance policies in place.
And transition risks to a low-carbon economy meant changes in policies, revaluation of assets, and reallocation of capital across sectors.
This was why it was also important for businesses to contribute to a lower carbon economy so as to provide a better quality of life in the future.
Central banks across Europe, including the European Central Bank, the Bank of Portugal, and the Bank of England, have strengthened their analysis of these risks in a manner that is fully consistent with their mandates with work that has focused on enhancing data availability and disclosure practices.
Not an easy task. “We talk in euros and pounds, we’re not used to talking about CO2 tonnes, so it’s all new. It’s something that requires a lot of effort to understand if we’re doing things right or wrong.”
Therefore, central banks are simulating things like climate shocks or different scenarios of evolution for temperatures on the surface of the planet for longer or shorter periods to develop models on how banks, for example, are going to be able to accommodate these changes, if they have enough capital, and how different types of companies cope, and which companies are more subject to transition risk than others.
And the Bank of Portugal and other watchdogs that supervises insurance the markets, including the financial markets, have to produce annual reports on the exposure of business sectors to climate risk and advise accordingly.
€500Bn of investment by 2030
A recent report from the European Central Bank indicates that the European Union alone would need additional investment of around €450 to €500 billion per year by 2030, corresponding to around 3% of GDP, to meet its climate and energy objectives, particularly in clean energy, infrastructure, and electrification – a huge amount.
But at the core, “competitiveness in a changing global economy in the current context, will increasingly depend on interrelated factors that I think we should worry about; energy costs, technological capacity, and the ability to attract capital. So recent energy market volatility makes this clear. Economies that remain exposed to external shocks face higher macroeconomic volatility”, Clara Raposo warned.
In his introductory speech, the Chairman of the Board of Directors at the British-Portuguese Chamber of Commerce (BPCC), Rui Almeida, explained that Europe today faced other major challenges apart from the energy crisis and geopolitical uncertainty.
These included technological disruption, competitiveness pressures, sustainability and energy transition, as well as growing questions about financial resilience.
In such a context, “having people and institutions that are capable of combining technical rigour with strategic vision” meant that a long-term perspective, and independent thinking became incredibly important.
Navigating complex mandates
The British Ambassador, Lisa Bandari, welcoming corporate members and guest speaker Clara Raposo, emphasised, “we really value our collaboration at the embassy with the BBCC and with you as members, many of whom are, of course, also key partners of the embassy.
I think one of the areas where we are very like-minded, and particularly unites the UK and Portugal, is our shared commitment to sustainable
economic growth, including, of course, some of the challenges and the opportunities that come with that”, she said.
And added, “this is a difficult moment in global affairs with a continued global economic investment. We have geopolitical uncertainty that is through the roof and, at the same time, the imperative of climate transition.
“That means that central banks are navigating more complex mandates, I think, than ever before. And they have to think about price stability, financial resilience, but we also have to think about sustainability and climate-related risks”, concluded the ambassador.
Text: Chris Graeme
Photos: Joaquim Morgado
