Bulgaria’s National Bank Warns Wage Growth Will Drive Inflation in 2025

The Bulgarian National Bank (BNB) has warned that the strong growth in private consumption and the rise in labor costs per unit of production will have a pro-inflationary effect, leading to an uptick in inflation in the beginning of 2025. This forecast comes after a significant slowdown in inflation this year, which reached its lowest point in four years at 1.2% annually in September. The BNB anticipates that inflation will continue to decrease until the end of 2024, but it will accelerate moderately in the first quarter of 2025, driven primarily by income growth, which will spur domestic consumption and place upward pressure on prices, particularly in services and food.

In its latest "Economic Review," the BNB pointed to private consumption and rising labor costs as the key drivers of inflationary pressure. These factors contribute to increased consumer prices in services and food sectors. While the BNB did not provide a specific inflation forecast for 2025, it noted that higher disposable income, supported by social payments, public sector employee compensation, and minimum wage increases, has contributed to increased household consumption, creating favorable conditions for sustained inflation.

Starting January 1, 2025, several increases in wages will take effect. The minimum wage will rise by 15%, from BGN 933 to BGN 1,077. Increases of 30 to 50% will apply to salaries within the Ministry of Internal Affairs and the Ministry of Defense, while teachers and higher education personnel will see salary hikes of up to 20%. In response to a potential BGN 12 billion budget deficit in 2025, the Ministry of Finance has suggested postponing some of these increases until 2026, aiming to avoid risks of exceeding the inflation threshold of around 2% required for Bulgaria’s Eurozone entry.

The BNB also highlighted that the country's high liquidity, due to budget deficits funded by government securities, has affected interest rates in the banking system. Despite the European Central Bank’s interest rate hikes, these have not been fully reflected in Bulgarian banks. As a result, real interest rates on new household term deposits have remained less negative, which has continued to support private consumption and contributed to inflationary pressures. The central bank noted that even though real interest rates on new consumer loans turned positive by mid-2023, the demand for consumer credit has continued to grow, further fueling inflation in the first nine months of 2024.

Moreover, the BNB referenced business surveys conducted by the National Statistical Institute, which show that managers in the services and industrial sectors expect to raise prices in the near future. Despite lower international commodity prices, strong consumer demand and income growth are likely to prevent firms from passing on these savings to final consumer prices, particularly in services and food sectors.