The Impact of Tightening Monetary Policy in Bulgaria
The cycle of tightening monetary policy by the European Central Bank from 2022 to 2024, as well as the increase in the mandatory reserve requirement rate to 12% by the Bulgarian National Bank in 2023, has a limited effect on interest rates on deposits and loans in the household sector. This is in the context of a sustained high inflow of funds, high liquidity, and strong competition in the banking sector in Bulgaria. These findings are outlined in the quarterly “Macroeconomic Forecast” prepared by the Bulgarian National Bank.
Macroeconomic Forecast for Bulgaria
In the current and following two years, experts from the central bank of Bulgaria predict a slight increase in interest rates on new term deposits. This forecast takes into account market expectations regarding the dynamics of the main interest rates of the ECB and the assumption of maintaining the conditions in the banking sector in the country.
It is expected that this trend will continue mainly until the end of 2024 and will be more limited than forecasted in the March forecast of the Bulgarian National Bank. In 2025 and 2026, what does the BNB expect?
Interest Rates Forecast in the Eurozone
The interest rates on newly contracted term deposits are expected to remain close to the levels reached at the end of 2024. According to the forecast, interest rates on new household loans are projected to follow a weak upward trend during the forecast period (2024-206 g.), while interest rates on newly issued corporate loans are expected to decrease from the end of this year until the end of 2026. It is noted that they will follow the dynamics of short-term interest rates in the money market in the eurozone, as stated in the analysis by the BNB.
The annual growth of the interest rates is expected to be influenced by various economic factors and monetary policies implemented by the European Central Bank. It is crucial for investors and borrowers to stay informed about these developments in order to make informed decisions regarding their financial activities.
Non-Government Sector Deposits Expected to Remain High
Deposits in the non-government sector are expected to remain high as households continue to prefer saving in the form of bank deposits. However, this process is projected to slow down to 8.4% by the end of this year, and further to 7.6% and 7.5% by the end of 2025 and 2026, respectively, in line with the forecasted wage growth slowdown. The Bulgarian National Bank anticipates that the annual credit growth for the non-government sector will also decelerate to 11% by the end of this year, and further to 8.5% and 7.9% in 2025 and 2026, respectively. It is noted that the forecast takes into account the expected economic slowdown.
Overall, the projections indicate a shift in savings and credit behavior within the non-government sector, reflecting changes in economic conditions and consumer preferences. It is important for financial institutions and policymakers to monitor these trends closely to ensure stability and sustainable growth in the banking sector.
The impact of inflation on private consumption and housing prices
Inflation has a direct impact on private consumption and housing prices. When inflation is low, it can lead to a decrease in consumer spending and a slowdown in the growth of private consumption. This is because consumers may be more cautious with their spending when prices are stable or decreasing.
Additionally, low inflation can also affect housing prices. If inflation is low, it may result in slower growth in housing prices as the cost of living remains relatively stable. This can have both positive and negative effects on the housing market, depending on the overall economic conditions.
Therefore, it is important for policymakers to carefully monitor inflation rates and its impact on private consumption and housing prices in order to make informed decisions that will support economic growth and stability.
