Bulgarian National Bank Governor: Euro Adoption Impact on Inflation Is Limited, but Price Risks in Euro Area Are Rising

Bulgaria suffered only a small inflation bump when it adopted the euro on January 1 and public support ​for the common currency is now rising quickly, Bulgarian National Bank Governor Dimitar Radev said in an interview for Reuters on Ьзисв 7.

In his words, the effect on inflation is in the range of 0.3 to 0.4 percentage points, broadly comparable ​to Croatia’s experience. Inflation in the country actually slowed in January, to ‌2.3% ⁠from 3.5% in the previous month, and stood broadly in line with the euro area figure in March.

Bulgaria reported a limited and largely one-off increase in inflation with the introduction of the euro on January 1, and public support for the common currency is growing, Radev said in the interview. 

Radev noted that support for the euro has increased since accession to 54% among households, up from 45% before, while in business circles it stands at around 70%. According to him, the geopolitical situation, including the war in Iran, could further strengthen positive attitudes due to the perception of greater economic protection.

Radev, now a member of the ECB ​Governing Council, warned that inflation risks in the euro area are mounting due to rising energy prices and growing uncertainty. The balance of risks has shifted in an unfavourable direction, he noted, adding that the likelihood of a more negative scenario is increasing amid the energy shock.

According to Radev, there is a risk that households and business will adjust their inflation expectations more quickly, which could lead to secondary effects such as rising wages and prices and the formation of an inflationary spiral.

He emphasized that the European Central Bank must be prepared to respond promptly, including by raising interest rates, if signs of sustained price pressure emerge.

In his view, inflation expectations remain relatively stable at the moment, but the situation is highly dynamic and prone to rapid changes, and if the shock persists and begins to spill over into wages, margins, and expectations, the cost of inaction will increase, Radev said in the interview.

He noted that markets are already pricing in more than two interest rate hikes by the ECB this year, with the first expected in June.

The ECB will closely monitor inflation trends, energy prices, economic sentiment, and developments in the Middle East conflict, as these factors will be key to future monetary policy decisions.

Radev added that the euro area is entering the current situation from a more stable position compared to 2022, but warned that potential government subsidies could intensify inflationary pressures.