Rethinking Monetary Policy Amid Persistent Supply Shocks

Central banks are facing a new era where old certainties about inflation and interest rates are being tested by overlapping supply-side shocks and shifting economic fundamentals. In a recent speech, Petar Chobanov, Deputy Governor of the Bulgarian National Bank, outlined how the post-pandemic landscape—marked by slower growth, aging labor forces, geopolitical fragmentation, and climate risks—has created an environment where supply is less resilient and shocks are more persistent than before.

Chobanov emphasized that the traditional approach of "looking through" supply-driven inflation is no longer automatically viable. Instead, as repeated shocks keep inflation elevated, workers push for higher wages and businesses protect profit margins—dynamics that risk embedding inflation into the economy. This new persistence in inflation forces central banks to act more quickly and decisively, as delays in raising interest rates can allow inflation expectations to become unanchored, potentially shifting the entire economic regime toward higher and more volatile price increases.

The recent global wave of synchronized rate hikes underscores that the credibility of monetary policy is not a legacy, but something earned through consistent and resolute action. Going forward, Chobanov argued, central banks must keep price stability as their anchor, tailor interest rate policy to evolving economic regimes, and maintain the analytical tools to understand complex, overlapping shocks. While structural reforms are needed to make economies more resilient, monetary policy cannot defer its responsibility simply because supply issues are the root cause of inflation.

This return to the fundamentals of interest rate policy and price stability is crucial: as economies navigate uncertain shocks, maintaining trust in the value of money remains the central task for central banks worldwide.