Monetary policy must adapt to persistent supply-side shocks
Petar Chobanov, Deputy Governor of the Bulgarian National Bank, argued that central banks must return to fundamental principles of interest rate policy to combat persistent supply-side shocks. Speaking at a Financial Times event in Vienna on January 14, 2026, he emphasized that price stability remains the indispensable anchor.
Less elastic supply, more persistent shocks
Deputy Governor Chobanov highlighted that while supply shocks are not new, the environment in which they occur has fundamentally changed.
Economies today face slower trend growth, ageing populations, tighter labour markets, more fragmented trade and geopolitics, and greater exposure to climate-related disruptions.
This makes supply less elastic and less able to absorb disturbances, leading to shocks that overlap and reinforce one another, repeatedly pushing inflation above target.
Monetary policy frameworks developed pre-pandemic assumed transitory shocks, weak transmission into wages and expectations, and strong central bank credibility.
These assumptions, Chobanov argued, can no longer be taken for granted, necessitating a re-evaluation of how central banks respond to supply-driven inflation.
Endogenous persistence demands action
The traditional approach of 'looking through' supply-driven inflation is no longer viable, Chobanov argued.
This strategy, effective only when inflation expectations are firmly anchored, breaks down when recurrent shocks alter economic agent behaviour.
Prolonged high inflation fuels wage resistance and prompts firms to protect profit margins, generating significant second-round effects.
This creates a regime shift where expectations become more sensitive to realised inflation, and delaying action becomes more costly.
Central banks must therefore lean against inflation, even if initially supply-driven, to prevent a transition to a high-inflation regime and safeguard price stability.
Credibility earned through action
Chobanov's call to return to basics underscores a crucial shift: central bank credibility is not inherited but continuously earned through decisive action.
The recent tightening cycle, though painful, proved that interest rates remain the most powerful tool against de-anchoring expectations.
This perspective rightly prioritizes unwavering commitment to price stability and robust analytical capacity over passive observation in a world of complex, interacting shocks.