site.btaInflation Rise from Euro Adoption Will Be Small and Short-Lived, Says BNB Governor

Any rise in inflation in Bulgaria as a result of joining the euro will be small and short-lived, Bulgarian National Bank (BNB) Governor Dimitar Radev told MNI in an interview, quoted by BNB on Tuesday. He added that rates in both Bulgaria and the single currency zone are close to neutral.

Annual inflation hit 4% in March due to changes in administered prices and the ending of pandemic-related measures, before dipping in April close to the 2.8% reference rate used by the European Central Bank to judge price stability even as rates eased. The BNB’s Base Interest Rate has since been lowered further, to 2.07%, with annual inflation this year seen averaging around 3.6%, according to Eurostat's May projections.

Following is the full text of the interview with Radev:

“Inflation developments in the rest of 2025 and in 2026 will be shaped mainly by external price developments and domestic cost factors, the latter reflecting the ongoing catching-up process”, Radev said commenting the European Central Bank’s (ECB) decision to give the green light for Bulgaria’s becoming the 21st country to use the euro from Jan 1, 2026. “Given the significant real convergence already achieved with the euro area, the risk of pronounced inflation differentials with the euro area remains relatively low,” he added.

Radev agreed with statements by ECB officials that while estimates of the neutral or natural rate of interest may vary, current short-term euro area interest rates are close to that level – a situation also true of Bulgaria.

“During the recent inflationary period there was a notable divergence between the two, with the real interest rate falling well below its natural level - signalling an easing of monetary conditions. However, this gap has gradually closed and, as of mid-2024, the two rates are assessed as broadly aligned,” Radev emphasized.

Dual Price Display

The BNB will support government efforts to monitor price developments during the period of dual price display after the changeover, though Radev said the experience of other euro area countries, as well as Eurostat’s assessments, showed the impact of euro adoption on inflation is generally small and short-lived.

Croatia, which joined the euro in 2023, did so amid strong negative supply shocks, surging global inflation, and aggressive monetary tightening. Bulgaria, by contrast, does so against a background of heightened geopolitical risks, Radev said, though he added that this should not alter the fundamentals of the transition.

“We do not expect any significant differences from Croatia’s experience in terms of the technical and institutional aspects of euro adoption, as the process is well established and Bulgaria is well prepared,” the BNB Governor noted.

High levels of liquidity in Bulgaria’s banking system mean the reduction of the minimum reserve requirement from 12% to 1% is unlikely to have a significant impact on inflation, Radev said. Being fully subject to ECB monetary policy will also strengthen the transmission of that policy to domestic conditions, he said.

Leaving Lev

With low public debt, a robust banking sector and an economy that has proven resilient to recent global shocks, Bulgaria enters the euro area with ‘very solid’ macroeconomic fundamentals, Radev said.

“Every country in the euro area is different and as such, of course, there are specificities and differences in how each country’s economic and financial conditions would change in response to shocks. However, I do not see any areas in which domestic policies in Bulgaria are insufficient to address potential problems and I see no reason to rely on ECB actions to resolve such potential problems,’’ Radev said.

Radev also dismissed any suggestion that the decision to drop the lev currency is unpopular.

“As in many other countries, public concerns around euro adoption are often amplified and leveraged by certain political actors for short-term gains. These voices, however, are far from being a majority in the Parliament,” he said.