Against this background, the central banks of accession countries should simultaneously be concerned about the need to further advance disinflation and to catch-up with real income and price levels in the euro area. The strict respect of the Maastricht inflation criterion should be seen as a medium-term objective and not as an immediate goal, if progress towards the achievement of this criterion would jeopardise the catching-up process. Nevertheless, the ultimate fulfilment of the Maastricht criteria over the medium term should provide monetary policy with the appropriate  2  BIS Review 84/2001  framework for gradually lowering inflation rates, thereby contributing to macroeconomic stability and sustainable growth. Together with the maintenance of inflation differentials with the euro area, catching-up in terms of real per capita income and price levels may also imply an appreciation of the real exchange rate. In this fashion, exchange rate policy should support the convergence process without any constraint to real sustainable growth. Again, neither the Eurosystem nor the ECOFIN Council can recommend a single exchange rate policy as the appropriate one to be pursued along the road towards the adoption of the euro. It is clear, however, that some accession countries will have to modify their exchange rate strategies to make them compatible with ERM II requirements. This applies mainly to the existing free floats (e.g. Poland) and pegs against anchors other than the euro (e.g. Latvia and Lithuania); in these cases, it will be crucial to identify the optimal timing of the revision of the different regimes.

The importance of the Bank’s role in this has been recognised through the Chancellor’s recent remit and recommendation letters to the Bank’s policy committees, which set out that the transition to a net-zero economy is now a part of the government’s economic strategy that the committees must have regard to.9 So what does this mean a central bank should do in practice? Financial system First, and foremost, it means building resiliency at a micro and macro level. We do this by ensuring the financial system proactively manages and pre-emptively mitigates the financial risks from climate change. That task falls squarely within the mandate of the Prudential Regulation Authority (PRA) and the Financial Policy Committee (FPC). The PRA has set supervisory expectations for banks and insurers to ensure they adopt a strategic approach to climate change and develop capabilities to effectively identify, measure, manage, and where outside appetite, mitigate the financial risks from climate change. This is a necessary component of protecting the safety and soundness of PRA-regulated firms. The FPC, alongside the PRC, will launch next week a Climate change Biennial Exploratory Scenario exercise – the CBES – to assess the resiliency of individual banks, insurers and the wider financial system to different climate scenarios. This type of scenario modelling and analysis is critical to enabling real decisions on climate-related risks by financial firms and policymakers. Assessing resiliency against a range of scenarios enables us to prepare for what might happen in the absence of certainty about what will happen.