Българска народна банка

Distinguished guests, dear colleagues, ladies and gentlemen,

It is a pleasure to welcome you to Sofia and to today’s OMFIF forum.

I would like to thank David Marsh and his colleagues, the Association of Banks in Bulgaria and all our partners for organising this event.

We meet at a time when the economic environment is becoming more challenging. This was also one of the main messages from the recent Annual Meetings of the International Monetary Fund and the World Bank in Bangkok.

The global economy has demonstrated resilience in the face of successive shocks. But risks are accumulating, while the room for policy responses is becoming more limited.

For Europe, these challenges are particularly important.

At its meeting on 29 October, the ECB Governing Council decided to leave the three key interest rates unchanged, following the increase in September.

I consider that decision appropriate. It gave us time to assess the effects of the energy shock and the tightening of financial conditions.

But the inflation outlook has deteriorated since September, and this must be reflected in our assessment of the appropriate monetary policy stance.

The October pause was a decision to assess the evidence, not a conclusion that monetary policy tightening is over.

Let me explain why.

Annual inflation in the euro area reached 3.8 per cent in September. A significant part of the increase was driven by energy prices, which rose more than anticipated in the ECB’s September projections.

This points to higher inflation than previously expected and a risk of a more prolonged deviation from our two per cent target.

The critical question is how far these pressures will spread to other prices, wages and inflation expectations.

So far, underlying inflation has remained broadly stable, and we have not seen a widespread transmission of the energy shock to wages. This is encouraging, but it does not eliminate the risks.

The latest ECB Survey of Professional Forecasters illustrates the challenge. Expectations for headline inflation in 2027 have been revised upwards to 2.6 per cent, while those for core inflation have risen to 2.5 per cent.

Longer-term inflation expectations remain anchored at two per cent. Preserving that anchor is essential.

The revisions for 2027 nevertheless suggest that the effects of the energy shock may prove more persistent than previously anticipated.

We should therefore pay particular attention to indirect and second-round effects.

We should not wait until second-round effects are fully established before assessing whether further action is needed.

At the same time, there are reasons for caution.

The euro area economy continued to grow in the third quarter. But higher energy prices are weighing on consumer confidence, while higher long-term bond yields and tighter bank financing conditions are restraining demand.

These developments are likely to dampen economic activity and inflation. We must take them fully into account.

This is precisely why our decisions must remain based on the evidence.

The Governing Council is well positioned to respond to developments. But we should not assume that the current level of interest rates will necessarily remain sufficient if inflationary pressures persist.

In December, we will have updated projections and additional economic and financial data. They will allow us to assess more fully the persistence of the energy shock, its indirect effects and the risks of broader transmission to prices and wages.

If incoming data confirm that inflationary pressures are becoming more persistent, further interest rate increases may be necessary.

This is not a pre-commitment to any particular decision. We will continue to decide meeting by meeting, taking into account the inflation outlook, underlying inflation and the strength of monetary policy transmission.

But I would emphasise one point.

Data dependence does not mean passivity. It means responding when the evidence warrants action.

Our responsibility is to ensure that inflation in the euro area stabilises at two per cent over the medium term.

The more challenging the environment for monetary policy becomes, the more important the quality of other economic policies is — first and foremost, fiscal policy.

The ECB Governing Council has repeatedly emphasised the importance of sustainable public finances.

Fiscal measures in response to the energy shock should be temporary, well targeted and tailored to specific circumstances. Predictability in economic policy is equally important.

Uncertainty surrounding public finances or changes to the rules governing businesses can weaken confidence, discourage investment and contribute to a further tightening of financing conditions.

This matters not only for economic growth, but also for the effective transmission of monetary policy.

Let me now turn to Bulgaria.

Since the beginning of this year, the Bulgarian National Bank has participated fully in the Eurosystem. After many years under the currency board, we now take part directly in decisions on common monetary policy and share responsibility for their implementation.

This is a fundamental institutional change.

But accession to the euro area does not eliminate differences between national economies, nor does it remove the need for sound domestic policies.

Inflation developments illustrate this point.

In September, Bulgaria’s annual inflation rate was 5.6 per cent, measured by the Harmonised Index of Consumer Prices, compared with the euro area average of 3.8 per cent.

These figures show that inflationary pressures in Bulgaria remain stronger than the euro area average.

The common monetary policy provides the framework for price stability across the euro area. But national economic conditions continue to matter, including domestic demand, credit developments and financing conditions.

Joining the euro area does not remove Bulgaria’s domestic economic risks. It makes sound national policies and strong financial supervision even more important.

This is where national central banks and supervisory authorities have specific responsibilities.

They must monitor not only the condition of the banking system, but also risks arising from changes in the economic, legal and regulatory environment.

When such changes may affect banks’ resilience, lending or the cost of financing, an independent central bank has a responsibility to assess their consequences and communicate them clearly.

Bulgaria’s banking sector remains well capitalised and liquid, while credit continues to grow at a strong pace, particularly in housing lending.

This calls for a preventive approach to supervision and macroprudential policy.

Strong banking-sector indicators are not a reason to relax requirements. They provide an opportunity to maintain adequate buffers before risks materialise.

Our objective is to preserve the resilience of the banking system and its ability to finance the economy, including under more difficult conditions.

Beyond Bulgaria, Europe faces a broader challenge.

It needs greater investment, higher productivity and stronger competitiveness.

Completing banking union and developing the Savings and Investments Union can help mobilise European savings and channel them towards productive investment.

But deeper financial integration requires more than new frameworks. It depends on sound institutions, credible policies and confidence in the European financial system.

Let me conclude.

Bulgaria’s accession to the euro area has brought new responsibilities — both in shaping our common monetary policy and in safeguarding the stability of our national financial system.

In the present environment, the central task is to preserve confidence: confidence in monetary policy’s ability to deliver price stability, in the sustainability of public finances and in the resilience of the banking system.

This requires consistency in our decisions, clarity in our responsibilities and readiness to act when circumstances demand it.

Thank you, and I wish you a productive discussion.

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