site.btaUPDATED Central Bank Governor: It Will Take Tightening Monetary and Fiscal Policy to Contain Inflation

The intention to keep the budget deficit within 3% of GDP is "a step in the right direction",  Bulgarian National Bank (BNB) Governor Dimitar Radev told BTA in his first interview after his reelection earlier in July. He explains that the existence of a negative difference between government revenue and expenditure speaks of continued fiscal expansion, which is not helping to curb inflation - quite the opposite. It is crucial to work towards synchronizing fiscal and monetary conditions, he also said. He continues to consider January 1, 2025 as the target date for euro adoption in Bulgaria.

In the interview Radev spoke about the current challenges facing the central bank and Bulgaria's economy, the process of Bulgaria's entry into the eurozone, the groups of measures taken in recent months to curb credit growth, and the design of the Bulgarian euro coins.

He told BTA that at its last meeting the BNB Board decided to reproduce the design of the Bulgarian coins currently in circulation, which will ensure continuity. In other words, the Bulgarian euro coins will have on them the image of the Madara Horseman (on 1 to 50 euro cents), St. Ivan of Rila (1 euro) and Paisii Hilendarski (2 euro).

Mr Radev, congratulations on your election for a second term as head of the BNB. What do you see as the key challenges facing the institution?

Thank you! The immediate challenges are related to the uncertain and changing macroeconomic environment. On the agenda are also the tasks of building the necessary institutional and technical framework for a successful adoption of the euro in Bulgaria.

In your opinion, what are the macroeconomic risks facing the country and how do you see them being resolved?

There are two issues and they are interrelated: inflation and economic growth. How they evolve depends to a certain extent on external factors, but internal factors, and in particular the development of the monetary and fiscal conditions in the country, are of growing importance.

BNB pursues a systematic and consistent policy of tightening monetary conditions. The latest step in this respect, effective from July 1 this year, is the 12% increase in the minimum reserve requirement that banks must keep with the BNB. What it means in practice is withdrawing several billion leva from commercial banks. The aim is to reduce the credit expansion of banks, primarily in the segment of housing loans. This will push down demand and consumption, and therefore inflation.

The decisions for tightening monetary conditions are difficult for any central bank. They have to be calibrated in such a way that they help contain inflation without stagnating the economy. And that is what we are doing and will be doing this year and also to a large extent next year.

How would you comment on the fiscal conditions that you mentioned, especially in the context of the adoption of the 2023 budget?

The intention to keep the budget deficit within 3% of GDP is a step in the right direction. At the same time, taking into account the trajectory of the economic cycle and the change in the composition of budgetary expenditure, a 3% deficit implies a limited but continued fiscal expansion. Fiscal expansion is not a factor in containing inflation, quite the opposite. In this regard, it is crucial to work towards synchronizing fiscal and monetary conditions. In terms of the objective of containing inflation, the direction of this synchronization in the short term should be towards tightening both monetary and fiscal conditions.

In the long run, which is better for controlling inflation - maintaining the currency board or joining the euro area?

Participation in an economic and monetary union with historically lower inflation, such as the euro area, is a factor, other things being equal, for better control of inflationary processes, both in the short and long term. This is what all the data since the creation of the euro area show.

Does January 1, 2025 remain a realistic target date for our accession to the euro area?

Yes, if we do the right things and meet the necessary conditions with a focus on inflation. The only formal condition that the BNB has to fulfill is maintain currency stability. This condition is fulfilled through the participation of the lev in the European Monetary Mechanism. There is no scenario in which this condition can be breached. The other main task facing the BNB is technical preparation. Based on the progress made so far, I can say that the BNB and the banking sector will be ready for the euro changeover well before the deadline.

If the current political construction proves to be sustainable enough, I expect the government to fulfil the remaining, more numerous, conditions within its competence.

What images and design elements do you consider appropriate for the Bulgarian euro coins? How far has the process of minting trial euro coins gone?

Following the signing of a memorandum on that with the EC and the Eurogroup last December, we now have the full documentation for the minting of the Bulgarian euro coins.

At its last meeting, the BNB Board agreed on the idea to reproduce the design of the Bulgarian coins currently in circulation, which will ensure continuity in the currency used and facilitate the recognition of the new currency by the Bulgarian citizens. These include St. Ivan of Rila on the 1 euro coin and Paisii Hilendarski on the 2 euro coin.

The national side of the Bulgarian euro coins will have a Cyrillic inscription of the word "Bulgaria", as well as the word "euro" (for the coins of 1 and 2 euro) and "cent", respectively "stotinki" (for the coins of 1, 2, 5, 10, 20 and 50 euro cents). On the edge of the largest euro coin, of 2 euro, will be the Cyrillic text "GOD SAVE BULGARIA", which is in line with the historical Bulgarian coinage traditions.

The designs are to be prepared and submitted to the Coordinating Council for Bulgaria's preparations for eurozone membership. After their final approval, the designs will be presented to the Council of the European Union, the European Commission and the euro area Member States.

Croatia joined the eurozone at the beginning of this year. What experience with the euro changeover have your colleagues from Zagreb to share - and in general, all euro area countries?

There have been no unexpected developments since Croatia joined the euro area. The country's credit rating, which was worse than Bulgaria's before it joined the euro area, is now better, which has significantly improved its financing conditions. Inflation is falling, not rising. There is a boom in tourism and investment.

The contacts we have with our Croatian counterparts is very good. We helped them in the beginning when we were leaders in the process, and now we are counting on their support, as well as the support of the other euro area central banks.

How do you assess the credit market in the country and do you think that additional measures are needed to influence its sustainable growth? Has the BNB used all its tools in this direction?

The pace of credit expansion is slowing down. We are influencing the process through three sets of measures. First, we use the available monetary policy tools - for example, the decision to increase the reserve requirement I already mentioned above. Second, we use supervisory and macroprudential policy instruments - for example, the increase in the countercyclical capital buffer. And third is accelerating the transmission of ECB monetary policy, which pursues the same objective. We are monitoring the process closely and stand ready to activate additional measures if necessary.

When can an increase in deposit rates be expected?

Interest rate rises are slower in our country due to the high liquidity of our banking system. The upward trend will become clearer towards the end of this year and next year. And this applies to both deposit and lending rates.

Any new stress test being planned for the Bulgarian banking system?

This process has not stopped. Under the Lending Institutions Act, the central bank conducts annual stress tests of banks. Based on the results, we set capital and other mandatory requirements for banks. This process no longer generates widespread public interest as the stress tests of 2016 and 2019 did, which is actually good news.

During the COVID pandemic, the IMF decided to distribute USD 650 billion among the countries participating in the Fund. Bulgaria received nearly 859 million special drawing rights with an equivalent of about BGN 2 billion. How was this funds used?

This decision was taken by the IMF Board of Governors, in which I participate. With the funds received, we increased the foreign exchange reserves. This was one of many examples of the benefits of our integration into the European and global financial infrastructure. Similarly, our future participation in the capital of the ECB as a member of the euro area will give us access to the monetary income of the euro system.