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. * * * 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. 1 / 3 bis - central bankers'speeches 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