There is much discussion these days about the course of
monetary policy in the euro area. What global headlines rarely
catch, however, is how such policy affects the European
economies outside the euro area.
Bulgaria is an example where, due to the high openness of
our economy and the strong financial links with the euro area,
spillovers from the ECB's monetary policy decisions are fast
Around 50% of Bulgaria's exports go to the euro area.
Investors from the euro area account for 67% of our FDI stock.
Our banking system is dominated by the presence of euro area
owned banks, which hold around 55% of the sector's assets. The
monetary policy regime in Bulgaria (a currency board with the
national currency fixed to the euro) is another factor
enhancing the direct transmission of the ECB's monetary policy.
Therefore, even though Bulgaria is not a member of the euro
area yet, it is important to consider how our economy is
affected by the ECB's continued accommodative stance.
Financial stability and its implications are issues to be
potentially concerned about. The ECB's monetary policy in
recent years has succeeded in sustaining the economic recovery
in the EU following the great financial crisis. In the EU
countries that are not using the euro, the effects from
monetary conditions in the euro area led to improving
macroeconomic environment, loosening financing conditions, and
high bank liquidity. That stimulated lending and, in turn, the
increase in residential property prices. However, these
developments also increased cyclical risks.
The Bulgarian National Bank conducted research into
Bulgaria's financial cycle. Our findings showed that we are
currently in an upward phase of cyclical risk accumulation.
Hence, we activated and then raised the rate of the
countercyclical capital buffer.
We have so far taken two decisions. In 2018, we set the
countercyclical capital buffer rate applicable to credit risk
exposures in Bulgaria at 0.5%, with effect from October 1 2019.
In early 2019 we raised the rate to 1.0%, with effect from
April 1 2020. The rate is applied to the overall credit stock
of banks and not to the volume of newly issued loans. We
announced that we could increase the rate to a higher level
earlier if credit growth significantly accelerates.
Our decisions were taken despite the fact that the standard
metric of how the credit-to-GDP ratio deviates from its
long-term trend remained deep in negative territory.
Furthermore, we strengthened the macroprudential powers of
the Bulgarian National Bank. The key element here was the
introduction into Bulgarian law of a framework of
borrower-based measures – requirements such as
loan-to-value (LTV) and loan-to-income (LTI) – in
addition to the existing capital-based measures.
As monetary easing in the euro area is likely to stay for
quite some time, policymaking in the non-euro area countries
affected by the ECB's monetary policy needs to remain
attentive. From a regulatory and a supervisory perspective,
both positive and negative externalities from the euro area to
our economies will need to be properly managed.