Petar Chobanov insists on an accelerated reduction of inflation to the EU average levels

At the national level, and especially in view of our expected accession to the Eurozone, the immediate challenge is to successfully navigate the eventual reduction of inflation to EU average levels by carefully calibrating fiscal policy in response to the dynamics of core inflation. Moreover, the effective control of wage and price pressures in Bulgaria should not be administrative, but organized on the basis of quality data, results and effective tripartite dialogue between the main actors. This is what Petar Chobanov, deputy governor of the BNB and head of the Banking Department, told the participants in the "Financial Forum 2024".

Here is the full text of Chobanov's speech, published on the BNB website.

First of all, I want to express my sincere gratitude to speak in front of you at this event and welcome all participants to this wonderful conference where we will discuss important topics such as the potential for growth, the development of the fintech sector, cutting-edge technologies and innovations in financial and payment services, sustainable investment and digitization.

Let me begin with a brief analysis of the outlook for the global economy and the macroeconomic outlook ahead. At the global level, the recovery of the economy after the COVID-19 pandemic, together with the war in Europe and the crisis in the Middle East, have been intertwined with phenomena such as the sharp increase in the cost of living. The overall economic recovery performed better than expected, supported mainly by a sharper-than-expected decline in global inflation from its peaks in 2022. In addition, the labor market registered better resilience in terms of employment and activity, thus favoring supply processes in the global economy. A major role in this process was played by the tightening of monetary policy by key central banks, which had a strong impact on inflation expectations. 

On every occasion, I always emphasize the enormous importance of the synergistic relationship between monetary and fiscal policy both domestically and globally. In this line of thinking, we should always keep an eye on fiscal developments in major countries and our major trading partners due to the fact that the current increased interest rates aimed at fighting inflation must be combined with adequate fiscal policies, especially in a high public debt environment, and so risks to economic growth are expected to be controllable, adaptable and predictable.

According to supranational estimates (e.g. IMF), global growth is projected to gravitate to around 3.1% in 2024 and 3.2% in 2025. It should be noted that in dynamics the forecasts for 2024 and 2025. are elevated due to positive results in the United States and the emerging market in general. In addition, fiscal support in China also plays an essential role in improving global economic activity.

On the other hand, it should be emphasized that the international forecasts for 2024 and 2025 are below the historical 20-year pre-pandemic averages mainly due to the tightening of monetary policy by central banks as well as moderate fiscal support in contrast to the period of COVID-19. However, globally, inflation appears to be slowing more than expected in most regions, but there are still significant supply-side challenges. However, independent forecasts for future global inflation are being revised downwards, pointing to more stable and sustainable economic growth. With the above processes in mind, the probability of a hard landing has decreased significantly and thus the risks to global growth are generally managed.

One important aspect centers around the question of whether faster disinflation could further ease the financial environment. Here, a generally unrestricted fiscal policy has the potential to temporarily lead to higher growth, but also to provoke an adverse risk of a costly adjustment in the medium to long term, especially in terms of public finances and long-term sustainability. A strong emphasis should be placed on structural reforms that have a direct effect on productivity, especially in terms of improvements in social safety nets that could lead to positive spillover effects. On the downside, the high likelihood of further commodity price shocks linked to geopolitical developments – including political uncertainty in the Red Sea region, coupled with further supply chain distortions – will lead to further tightening of monetary policy. Here, special attention should also be paid to the development of the property market globally and especially in China, which has the potential to hinder positive growth improvements.

At the national level, and especially in view of our expected accession to the Eurozone, the immediate challenge is to successfully navigate the eventual reduction of inflation to EU average levels by carefully calibrating fiscal policy in response to the dynamics of core inflation. Moreover, the effective control of pressure on wages and prices in Bulgaria should not be administrative, but organized on the basis of qualitative data, results and an effective tripartite dialogue between the main actors.

With declining inflation, the Bulgarian economy will be better prepared to absorb the effects of fiscal tightening, which sets the stage for the eternal discussion of fiscal consolidation, prudence and discipline to ensure budgetary capacity and fiscal space in the event of future shocks. A new formulation of fiscal spending priorities is needed, combined with proactive public debt management, which includes the huge potential of domestic debt issuance. The main policy tool for improvement with a proven effect is a series of well-designed and optimally managed structural reforms, especially in the social sphere, which would increase productivity growth and debt sustainability, and at the same time accelerate economic convergence with the EU.

Last but not least, the need for effective multilateral and international coordination in the field of private investment, green sustainable growth and climate change policies in general is evident. Close cooperation in areas of common interest is crucial for the transition to renewable energy and for building a durable and sustainable economy. Close supra-national cooperation with the EU and OECD also has the potential to improve Bulgaria's performance in areas such as healthcare, education, artificial intelligence and investment. This is the way we can overcome the chronic obstacles to the growth prospects of the national economy - international cooperation in a spirit of mutual respect, a strong fiscal framework, a focus on fiscal discipline, a flexible labor market and reformed social safety net mechanisms. The time to act in unison, harmony and agreement – business, academia, trade unions and government – is now.

Thank you for your attention!