Michele Bullock, who is due to replace Philip Lowe as head of the Reserve Bank of Australia in September, said it was important for the central bank to understand how the changing climate and the accompanying transition to a low carbon economy would push prices around.
In her final speech as deputy governor, Ms Bullock said there were both physical shocks and transition impacts to contend with.
"Hotter temperatures and more extreme weather will disrupt businesses, damage property and lower productivity growth," she said at the Sir Leslie Melville Lecture at the Australian National University.
"Actions taken to reduce emissions may present adjustment costs, but they will also present opportunities."
On the transition, she said there was "a lot of uncertainty in the area" but there is "general agreement that a timely and orderly transition will be the less costly approach in the long run".
For setting monetary policy, she said climate change could affect the neutral interest rate, which is when monetary policy is neither expansionary nor contractionary.
The impact of climate change on the neutral interest rate was not clear cut.
"In a world where significant climate risks materialise, households may be more likely to accumulate savings and firms may be less willing to invest, putting downward pressure on the neutral rate, and limiting the effective monetary policy space available to policymakers where interest rates are still positive," she explained.
"On the other hand, the extra investment required to replace capital stocks destroyed by more frequent natural disasters or to transition to a lower emissions economy could put upward pressure on the neutral rate."
Ms Bullock also said climate-related trends could cause the central bank to re-examine the merits of flexible inflation targeting.
The recent review into the RBA found the flexible target was working well and recommended it stay in use.
"Nevertheless, I expect that debate will continue," Ms Bullock said.
The Intergenerational Report released last week predicted higher temperatures could reduce economic output over the next four decades by up to $423 billion.
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