Bulgarian Central Bank's Governor: Euro’s Impact on Inflation Limited, Risks to Prices in the Eurozone Increasing

Bulgaria recorded a limited and one-off increase in inflation following the introduction of the euro on 1 January, while public support for the single currency is rising, Bulgarian National Bank Governor, Dimitar Radev, said in an interview with Reuters on April 7.

He said the effect on inflation was in the range of 0.3 to 0.4 percentage points and was comparable to Croatia's experience. Inflation in Bulgaria slowed to 2.3% in January from 3.5% a month earlier and broadly follows trends in the Eurozone.

He noted that support for the euro has increased since accession—to 54% among households, up from 45%, while among businesses it stands at around 70%. According to Radev, the geopolitical environment, including the war in Iran, could further strengthen positive attitudes due to a perceived increase in economic security.

The Central Bank Governor, who is also a member of the Governing Council of the European Central Bank, warned that risks to inflation in the euro area are rising due to higher energy prices and growing uncertainty.

“The balance of risks has shifted in an unfavourable direction,” he said, adding that the likelihood of a more negative scenario is increasing amid the energy shock.

Radev pointed to the risk that households and businesses may adjust their inflation expectations more rapidly, potentially leading to secondary effects such as rising wages and prices, and the formation of an inflationary spiral.

He stressed that the European Central Bank must be ready to respond in a timely manner, including by raising interest rates if signs of sustained price pressure emerge. For now, inflation expectations remain relatively stable, but the situation is highly dynamic and susceptible to rapid changes.

“If the shock persists and begins to feed into wages, margins and expectations, the cost of inaction will rise,” Radev said.

He added that markets are already pricing in more than two interest rate increases by the European Central Bank this year, with the first expected in June.

Radev also noted that the euro area is entering the current situation from a stronger position compared with 2022, but warned that potential government subsidies could further fuel inflationary pressures.

Source: BTA