Central Bank of Malta to assess climate change impact on economy

As climate change increasingly intersects with economic policymaking, the Central Bank of Malta (CBM) has confirmed that it is developing models to track the effects of abnormal weather events on Malta’s economy.

Abnormal weather includes extreme heat or rainfall, both of which have been increasing in their frequency and intensity in recent years.

The data-driven model being constructed by the CBM will include the impact of such extreme events on local inflation and value-added generation, said a bank representative, with the results of the research due to be published next year.

The urgency of developing the right models to forecast the impact of climate change on the economy was highlighted during a media session at the European Central Bank earlier this month, where officials argued that extreme weather events and the green transition could drive up costs for critical raw materials and infrastructure.

In a conversation with BusinessNow.mt, one official suggested that the shifting climate reality may spell the end of low inflation.

Short-term impact ‘small in the aggregate’

When contacted for comment, the CBM stated that such “climateflation” is expected to have a limited impact on Maltese inflation in the short term. However, its influence could become more pronounced over longer time horizons.

“The economic impact of climate change and transition policies on the bank’s inflation and growth projections is assessed to be small in the aggregate over the standard projection horizon, which normally covers three years,” said a spokesperson for the bank.

This is partly due to the Maltese Government’s commitment to keep energy prices fixed, which “means that the direct effects of adverse energy shocks or say, a higher carbon price, have little bearing on Maltese inflation but mostly affect the fiscal balance.”

However, the CBM emphasised that over longer periods, larger impacts could materialise depending on the nature and duration of climate shocks, as well as the ambition and timing of adaptation policies. Sectoral differences will also matter, with fossil fuel-intensive industries likely to face more significant cost pressures.

Integrating climate into macroeconomic modelling

The Central Bank explained that it is actively working to integrate both transition risks and physical risks into its forecasting models.

Transition risks relate to the economic consequences of shifting to a low-carbon economy, including regulatory changes, technological developments and carbon pricing. “The Central Bank of Malta has already made progress in integrating transition risks into its economic models, dedicating substantial effort to seek capturing the effects of climate policy and the green transition on the broader economy.”

In particular, the bank has focused on carbon prices and climate-related fiscal policies when preparing its projections. It has also used its Business Dialogue survey to assess how local firms are preparing for and being affected by climate-related policies.

Building sector-specific models

Recognising that climate change will affect industries differently, the Central Bank has enhanced its structural economic model to include a detailed energy block. This enables simulations of how ETS (Emissions Trading System) carbon prices and fiscal policies might reduce emissions in sectors such as energy and transport.

It has also developed sector-specific models to explore how different industries will be impacted by the green transition.

Notably, the bank has already published research examining the macroeconomic implications of extending carbon pricing to the maritime sector and is currently assessing the effects of energy subsidies in Malta – with early results published in late 2024.

Next step

While progress has been made on transition risks, the bank is now turning its attention to physical risks – the direct consequences of climate change such as extreme weather events.

“We are in the process of incorporating these channels into our analytical framework,” the bank explained, noting that a data-driven model is being developed “to track the effects of abnormal weather events (such as extreme heat or rainfall) on local inflation and value-added generation.”

The results of this research are expected to be published in 2026.

As climate-related disruptions increasingly shape global economies, the Central bank of Malta’s ongoing work in this space signals a broader shift in how monetary authorities approach price stability.