site.btaBulgaria Is Very Close to Meeting Inflation Criterion for Euro Area Admission, UBB Analysis Says

Bulgaria is very close to meeting the inflation criterion for euro area membership, according to an analysis by United Bulgarian Bank (UBB). UBB chief economist Dr Emil Kalchev, who analyzed the inflation data for November, says the country could meet the price stability criterion as early as the beginning of 2025.

The analysis points out that in November consumer inflation (according to the national methodology) accelerated slightly to 2.1% (compared to November 2024) compared to 1.8% in October 2024. Harmonized inflation for November remained at its October level (2%), while underlying inflation (excluding food and fuel) slowed slightly to 2.9% from 3%. "If the trends in Bulgaria and the euro area continue, Bulgaria will meet the price stability criterion for joining the euro area in January 2025," Kalchev forecast. According to the economist, inflation in the eurozone has normalized and the intense growth in house prices has been contained as a result of the European Central Bank's monetary policy.

"Inflation in the euro area is normalizing and the intense growth in house prices has been contained", Kalchev pointed out, adding that for five quarters declines were registered and only in the second and third quarters of 2024 showed (slow) year-on-year increases of 1.3% and 2.6% respectively. According to the analysis, in the third quarter of 2024 (latest data), house prices in Bulgaria grew by 16.5% compared to the same period in 2023, which is far faster than inflation in the country and house price growth in the EU and the eurozone.

"The ECB's monetary policy has had very little impact at home [in Bulgaria]", Kalchev said, adding that the Bulgarian National Bank, deprived of the tools of classical monetary policy in a currency board, implemented a number of measures to contain property prices. It significantly increased the minimum reserve requirements of commercial banks and some buffers. "Focused on mortgage lending, restrictive rules have been in place since October 2024, the effect of which is not yet statistically available," notes Emil Kalchev.

Against this background, fiscal policy has been pro-cyclical. Thus, public sector wages grew by nearly 9% year-on-year in 2022, by 14% in 2023 and by 17% in the nine months of 2024, the analysis said.

"These have boosted overall wage dynamics in the country, encouraging property seekers", Kalchev said, adding that "the latter are relying on their savings, bearing very low interest, and affordable mortgages to buy, amid a weak capital market. In addition, the possible imminent euro area accession is further stimulating house purchases, with a significant number of transactions taking place without the involvement of credit. Taking into account the third quarter data, we raise our 2024 house price growth forecast from 12.2 per cent to 15.1 per cent".

The analysis also showed that the industry posted a 1.2% real growth in September 2024 (compared to September 2023), after which it reported output at the October 2023 level, i.e. 0.0% growth.

"Given the recession in Germany and weaker growth in Romania, which are the two most important markets for Bulgarian exports, the result in October is rather satisfactory," UBB's chief economist said.

The construction sector grew by 8.7% in October, driven mainly by public projects, but also supported by building construction, which remained in positive territory.

The overall business climate indicator rose from 17% in November to 18.7% in December. By sector, industry expectations improved from 15.8% and 17.7%. In retail trade, they also rose from 23.7% to 29.4%. Services also saw a slight increase, while construction saw a slight decline in expectations from November to December, the analysis said.