finds that firms with greater exposure to geopolitical risk experience an increased probability of default, lower market valuations and higher financing costs. 3 climate change is similarly hard to forecast, as is visible for example in the struggles the insurance industry is facing to accurately price climate risks. an increasing frequency of extreme weather events means that claims costs no longer correspond to the historical data used to price risk. last year set a record for the highest number of insured natural catastrophes yet. 4 and climate change increases uncertainty about inflation, too : ecb research finds that extreme summer heat could ultimately push up food inflation in the euro area by between one and two percentage points. 5 the second factor that makes these risks special is that they reinforce each other. a weakening multilateral order not only makes it more difficult to agree on collective climate action, but it also increasingly threatens to disrupt the flow of clean technology that is necessary to lower the cost and accelerate the speed of the green transition globally. with china now becoming the dominant supplier of solar panels, battery cells and electric vehicles, we are seeing an increasing trade - off between faster decarbonisation and greater economic security as countries seek to reduce their dependencies. in turn, unmitigated climate change could strengthen fragmentary forces. for instance, an uneven distribution of extreme weather events may induce disorderly migration flows, straining international relations and encouraging policymakers to establish more barriers. one recent paper estimates that a changing climate could impel significant numbers of working - age people to migrate over the course of this century. 6 the third factor is that both risks are characterised by potential " tipping points " – that is, non - linearities – beyond which it would be very difficult to turn back. if the multilateral order were to break down, history suggests that the opportunity to rebuild it again may be a long time coming. indeed, every major overhaul of the international order, be it the congress of vienna in the nineteenth century or the bretton woods conference in the twentieth, was typically preceded and enabled by a major war. and were global heating to reach a certain level, we may see irreversible transformations. for example, as warmer weather causes permafrost in polar regions to thaw, stored methane is released into the atmosphere. this causes further heating, and a self - reinforcing feedback loop emerges. policymaking in an uncertain world 2 / 6 bis - central bankers'speeches so what can we do to make our policies robust in this

effects. but they also squeeze household and corporate incomes, weighing on domestic demand. [ 9 ] on this basis, the inflationary impact of a deterioration in the terms of trade could be seen as selfcorrecting, since it will generate weaker domestic demand that eases the inflationary dynamics that higher energy prices trigger. since an adverse terms of trade shock can create self - sustaining inflationary dynamics in the economy, it can be understood as raising at least temporarily the level of unemployment that is required for inflation to be at target – the so - called nairu. but how much the nairu will rise ( and for how long ) depends on how actively and persistently domestic firms and workers seek to sustain their own real incomes in the face of that shock. in coming to a view on how much monetary policy needs to respond to these inflationary pressures, the mpc will need to assess how much the nairu has risen and how much of a rise in unemployment will anyway follow from the weakening of demand owing to squeezed household incomes. recent mpc communication in december, the majority of the mpc stated that, should the data largely follow the outturns foreseen in our november forecast, further increases in bank rate may be required for a sustainable return of inflation to target. moreover, the committee as a whole repeated that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary. this communication rightly places the persistence of inflation at centre - stage. given the famous ‘ long and variable lags ’ in monetary policy transmission, it is the persistent component of inflation – that component of inflation that will still be there once the lags in monetary policy transmission unwind – that is the relevant object for the mpc ’ s attention. but judging inflation persistence in real time is difficult. by its nature, a persistent series does not change much from one mpc meeting to the next. such relatively high frequency month - to - month fluctuations cannot be the main driver of a series whose evolution must be dominated by lower frequency dynamics, if it is indeed to be persistent. in coming to an assessment of inflation persistence, the mpc has emphasised the importance of domestic price and wage setting behaviour, since this has historically proved to be more persistent that external drivers such as commodity price shocks. this has naturally led to a focus on wage developments, on services price inflation and – as new data sources, such as the bank ’ s decision maker panel, have become available –