Dimitar Radev: 2024 - the focus is still on curbing inflation and
joining the euro area
Publication by Mr Dimitar Radev, Governor of the Bulgarian National Bank, in the
Bulletin of the Association of Banks in Bulgaria, issue 77, January 2024.
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For central banks, including the BNB, the past year was marked by efforts to control
inflation and calm down financial markets by carefully pursuing a more restrictive
monetary policy designed to limit credit expansion and, consequently, demand.
In Bulgaria, lending, although growing at lower rates compared to 2022, remained high
in the light of a steady increase in deposits, a slow transmission of the global process of
rising interest rates to interest rates for households, and a stable capital position of
banks. In the context of the high inflation in Bulgaria, partly fuelled by both the fiscal
expansion and the strong growth of wages and private consumption, the BNB raised
the minimum required reserves on the funds attracted by banks up to 12%, withdrawing
liquidity from the money market and thus limiting lending opportunities. At the same
time, in order to preserve the resilience of the banking system against risks posed by
the financial and business cycle, the BNB gradually raised the countercyclical capital
buffer rate from 0.5% in 2021 to 2.0% in 2023. Keeping the systemic risk buffer at 3%
also contributed to the sustained capital position of banks.
With the undertaken monetary policy measures, 2023 was yet another strong year for
the banking system in our country. According to the European Banking Authority,
Bulgaria's banking system is among the best capitalised banking systems in the
European Union. The liquidity position remained very high, with ratios of liquidity
coverage and net stable funding well above the regulatory requirements. The profits of
the banking system were solid, with net interest income making the major contribution.
At the same time, the share of non-performing exposures continued to decline to the
historically lowest levels in all major segments of the loan portfolio.
However, the continuing strong growth of housing loans as of end-2023 created
conditions for an increase in households' debts, albeit from relatively low levels, and for
a rapid accumulation of credit risk in the banking system's balance sheet, which might
require that the BNB implement additional macroprudential measures in 2024, such as
system-wide requirements regarding borrowers, which banks must apply when granting
loans to households.
This risk might be reinforced by other potential challenges facing the banking sector this
year, such as a slowdown in the expected recovery of the European economy and a
cooling labour market, combined with a continuing relatively high inflation, a rising debt
weight and a bigger portion of non-performing loans. The materialisation of these
challenges would put pressure on banks' profits, whose significant growth rates in 2023
were largely due to one-off effects, including the slower transmission of higher loan
rates to deposit rates. Therefore, the one-off positive effects on profitability should
primarily be used to build up additional buffers in 2024.
Meanwhile, the BNB is ready to further influence credit activity in Bulgaria, by using
both the full set of macroprudential policy tools and the monetary policy tools at its
disposal. The purpose of their use, where necessary, would be two-fold: to maintain the
banking system's buffers at an adequate level and to withdraw additional liquidity, which
would create conditions for reducing consumer demand and lending, and thus
suppressing inflation and increasing the probability of meeting the price stability
convergence criterion.
This year the BNB will continue to work intensely on the final phase of the preparations
for Bulgaria's full membership in the EU's Economic and Monetary Union (the euro
area), mainly in terms of the legislation, IT systems' connectivity, and logistics of the
processes of printing euro banknotes and minting euro coins with a national side, their
transportation and storage.
The prospect of the full integration of our country into the euro area puts our monetary
regime on the edge of a historically important change that will qualitatively upgrade the
way we conduct monetary policy in the country.
The monetary conditions in our country during the transition between the two monetary
regimes will depend not only on the developments in the euro area, but also on the
developments in the country, including in relation to inflation, economic growth, fiscal
position, and credit risk.
However, what will largely determine the direction of our monetary policy in the short
term is the moment of our country's accession to the euro area. If in the middle of this
year the Council of the EU decides to accept Bulgaria into the euro area as from 1
January 2025, we will proceed to a smooth and controlled reduction of the requirements
for commercial banks regarding their mandatory minimum reserves in the BNB,
reducing them to 1%, according to the regulated level for all euro area countries. If,
however, the decision is postponed, it will mean an unfavourable development in terms
of the level and trajectory of inflation, and will most likely lead to additional tightening of
the monetary conditions in the country. Therefore, until late spring of this year, all
options are open.
The role of the BNB, with the country's admission to the euro area, will significantly
change both with regard to monetary policy decision making and implementation. In the
euro area, decisions are taken centrally by the ECB and implemented decentralised by
national central banks. Therefore, the BNB, through its governor, will participate in the
decision making using the full range of monetary policy instruments, including setting
the main monetary policy interest rate and conducting open market operations, and will
apply them on the territory of the country.
At the same time, joining the euro area will ensure the direct and rapid transmission of
the ECB's monetary policy to the Bulgarian economy, without the need for the BNB to
take additional measures, as is the current practice. Also, there will be no need to
maintain huge liquidity buffers in the Bulgarian banking system, practically frozen
resources that would otherwise support the growth of the Bulgarian economy. Among
other things, the need to maintain significant liquidity buffers stems from the normatively
highly limited, in practice - currently non-existent, function of the BNB as a lender of
last resort.
In conclusion, in 2024 the BNB will continue to work to achieve price stability and
sustainability of the banking sector in our country, in the context of the prospect of our
country joining the euro area, and taking into account the potential risks of credit
portfolio deterioration in the conditions of possible slower recovery of the global and
European economy. Until the moment of our full euro area membership, we will
continue to countercyclically apply the monetary policy tools available under the
Currency Board, so as to maximally boost the inflation convergence towards the
Maastricht reference value while taking into account the secondary effects on the
banking sector and economic activity. In a favourable scenario with a decision for
Bulgaria to join the EMU from 1 January 2025, we will speed up the practical
preparations for the introduction of the euro and the effective inclusion of the BNB in the
activities of the ECB and the euro area central banks, and we will take steps for a
smooth and controlled reduction of the requirements for commercial banks regarding
their mandatory minimum reserves in the BNB.