By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Martin Kocher said Tuesday that strong central-bank credibility can reduce the amount of monetary tightening needed after a supply shock and give policymakers valuable time to determine whether inflation pressures will persist.

Kocher, governor of the Oesterreichische Nationalbank, also stressed that such flexibility could not become an excuse for delaying necessary action and said the energy shock confronting the euro area in 2026 differed significantly from that of 2022.

“A credible central bank therefore needs to tighten less to stabilise inflation after a supply shock,” Kocher said in a keynote address to the 10th Annual Research Conference of the National Bank of Ukraine and Narodowy Bank Polski.

If households and firms trust the central bank to restore price stability, they are less likely to incorporate a temporary shock into wages, prices and longer-term expectations, meaning expectations themselves do part of the work of stabilizing inflation, he said.

Credibility could also “buy valuable time for the central bank,” Kocher said, because distinguishing a temporary disturbance from a persistent supply shock was difficult and policymakers did not have to rebuild their reputation from scratch after every shock.

That flexibility was especially important because negative supply shocks simultaneously raise prices and weaken economic activity, leaving central banks facing a more difficult trade-off than when excess demand is driving inflation, Kocher said.

“Stronger commitment does not always mean more forceful action,” he said. “If the supply shock is temporary and expectations remain anchored, excessive tightening can simply add a heavier recession to an existing loss.”

At the same time, Kocher warned against automatically looking through supply-driven inflation.

“The term ‘supply shock’ cannot become another way of saying ‘inflation to which monetary policy need not respond,’” he said, adding that the relevant question was whether a shock was beginning to influence the process determining future inflation.

The appropriate response therefore depended on the size and persistence of a shock and the extent to which it propagated into wages, prices and inflation expectations, Kocher said.

In that respect, the 2026 energy shock was materially different from the one following Russia’s full-scale invasion of Ukraine in 2022, he said.

In 2022, inflation was already high and accelerating, supply bottlenecks were widespread and demand was strong, Kocher said. By contrast, inflation in 2026 had begun much closer to target, demand was weaker, the composition of the energy shock was different and there had initially been less evidence of broad second-round wage effects.

There were consequently no simple rules for dealing with supply shocks, he said. Looking through a small and temporary price increase could sometimes be appropriate, while a large and persistent shock that fed into wages, prices and expectations presented a very different policy problem.

Kocher also rejected fixing an interest rate path in advance, arguing that in uncertain conditions rates had to adjust when the outlook and underlying data changed.

For the ECB, decisions depended on the inflation outlook and associated risks, incoming data, underlying inflation and the strength of monetary-policy transmission, he said.

“Our approach is data-dependent, moves meeting-by-meeting and does not pre-commit to any rate path,” Kocher said.

While the next decision was therefore necessarily uncertain, the principles guiding policy should not be, he said. A clear reaction function allowed policy to remain adaptable without becoming arbitrary.

Central-bank independence was crucial to that process, Kocher said, but independence alone did not guarantee credibility. An independent central bank could lose credibility if its decisions ceased to appear consistent with its mandate, while credibility ultimately depended on how the institution behaved.

Kocher also stressed that independence required accountability, saying greater use of judgment created a greater obligation for central banks to explain their decisions and remain open to scrutiny while insulated from political direction.