How Will Climate Shocks Redefine Monetary Policy and Energy Prices in Bulgaria by 2026?

Climate change is no longer just an environmental issue but a factor reshaping macroeconomic policies and the behavior of central banks. Extreme heatwaves and droughts, intensifying across Europe, are forcing institutions like the European Central Bank (ECB) and the Bulgarian National Bank (BNB) to integrate climate-related risks into their monetary strategies.

ECB: New approaches to climate risks

In July 2025, the ECB published an analysis warning that climate shocks could lead to high price volatility and complicate inflation forecasting. The institution plans to introduce climate-integrated monetary policy models that account for drought effects on agriculture, energy production, and food prices.

The report suggests that by 2026, interest rate tightening may be necessary after extreme climate events to control consumer price pressures.

Impact on Bulgaria

For Bulgaria, already part of the eurozone, the effect will be twofold:

• Interest rates: The BNB will need to follow ECB policy, potentially leading to higher rates after hot summers and droughts that exacerbate price pressures.
• Energy stability: Drought risks reduce hydropower capacity and increase dependence on gas and renewables, whose prices are volatile under extreme weather conditions.

Scenarios by 2026

Scenario A: Green monetary tightening

The ECB implements differentiated interest rate policies that favor green projects and penalize high-carbon industries. Bulgarian banks pass this effect onto clients through more expensive loans for energy-intensive sectors.

Scenario B: Risk to energy stability

Prolonged droughts cause spikes in electricity and fuel prices. This accelerates inflation and forces central banks to tighten liquidity.

Scenario C: Integrated monitoring and adaptation

The BNB and Bulgarian banks build systems to assess climate risks, enabling more accurate forecasts and minimizing economic damage. This strengthens the financial system’s resilience.

Conclusion

Climate shocks are creating new challenges for monetary policy and financial stability. Bulgaria’s and Europe’s responses will determine whether the transition is smooth or triggers new economic tensions.

Disclaimer:
This article is an analytical review by the BurgasMedia editorial board and reflects the opinion of an expert group based on current political, economic, and social developments.
The conclusions presented are not predictions or factual statements, but a hypothetical interpretation of possible scenarios.
The publication is not responsible for any discrepancies with future developments and encourages readers to form independent judgments based on verified sources.