Wage growth may outpace price growth by the end of this year
Banks are still full of fresh resource at a low cost
Banks operating in our country do not raise interest rates enough to cool down crediting and pay off the high inflation. This is shown by data from the BNB, a check by “24 Hours” and opinions of experts.
This policy is completely asynchronous with the movements of interest rates and inflation in the world and in Europe. The central banks of the world’s 20 largest economies have already raised key interest rates by an average of 3.5 percentage points.
At the same time, the official statements of the ECB and the Fed indicate that the expectations are for a too slow return of inflation to the desired 2% per year. More and more analysts believe that
interest rates are not a strong enough weapon against inflation,
and looking for the reasons for this.
Although inflation is high here, interest rates in Bulgaria continue to be low and there are no signs that they will go up.
According to the latest BNB data, the annual inflation of consumer and mortgage loans is falling, even after the BNB, in an attempt to cool lending, left a 2% buffer for risky loans until the second quarter of next year and continues to raise the key interest rate.
For May, the central bank reported an increase in interest rates for both households and businesses, but data on new lending volumes showed that the move made businesses just a little more cautious, while citizens continued to withdraw at an accelerated pace.
The average interest rate on BGN loans for consumption reached 8.66%, which is 0.85 points more than a year ago.
For mortgages in BGN, the average interest rate increased for a month by 0.06 points to 2.6%, and for a year – by 0.05. In fact, from the beginning of the year to the end of May, banks raised interest rates in three months, and lowered them in the other two. In the end, however, even with annual costs, home loans remain at less than 3% interest.
“The forecasts are for more serious inflation in Bulgaria in the next few years – not the double-digit growth from 2022, but far above the calm prices we were used to in the past decade,” said Adrian Nikolov, an economist from IPI, to “24 Chasa”.
On top of that, inflation is higher for food, the demand of which cannot be reduced, and this puts a dent in the pockets of low-income citizens.
Therefore, according to Nikolov, the question remains open as to whether employers will be able to compensate for the increase in prices in the wages of workers, as happened last year.
Economist Petar Ganev, however, drew attention to the fact that inflation in the last year or two has been running, roughly speaking, on similar scales as income growth. “Inflation was 11-12%, then 15%, it reached 19%, depending on which index we look at – the Bulgarian or the harmonized one. Wage growth is more consistent and hovers around 15% year-on-year, so
it was only when we were at the peak of appreciation that inflation ate up much of that growth
I predict that inflation will fall below 10% in the coming months, and if wage income growth continues at these levels, this will reverse the trend,” he said.
More and more experts believe that the growth of wages, especially in the private sector, is one of the reasons that keep inflation high in our country.
At the same time, the banks are overflowing with cheap fresh resources mainly from the deposits of citizens and companies, and as long as they do not experience liquidity difficulties, they will not raise interest rates.
Fierce banking competition is also slowing the pace of rate hikes. “Everyone is protecting their niche and their customers and until it becomes inevitable, they will not touch the interest rates more seriously,” described the situation a senior banker.
Expectations are that the breakthrough in interest rates in our country will take place in 2024,
starting with small banks,
which will be the first to experience a shortage of cheap financing. Only then can the big ones follow. So far, most of them have started to keep large depositors, offering interest rates above 2% for deposits above BGN 200,000, while for the rest, the yield continues to fluctuate around zero or slightly below 1%.
“The price of credit for households will rise, but the materialization of this trend will take longer than expected”, UniCredit Bulbank economists wrote in their analysis a few days ago. They expect interest rate increases on newly granted mortgage loans in BGN
to reach an average of 3.5% in 2024.
and up to 3.75% in 2025. Currently they are around 2.7%. The forecast for interest rates on already granted mortgage loans is to rise by about 0.5 p.p. in 2024 and 2025, when the bank’s economists expect the end of the era of ultra-low interest rates on household loans. Banking experts explain that the slower transfer of higher interest rates in developed economies to the cost of loans in Bulgaria is one of the reasons to avoid a sharper contraction of economic growth.
Along with these reasons, financial experts point out that the slowdown in inflation also affects the lower rate of yield growth. The expectations set in the budget until the end of this year show that
inflation will shrink to 9% this year
Economist Krasen Stanchev, for example, believes that in our country, apart from the over-liquidity of the banks, the monetary policy follows the changes in Europe with a time delay of about 6 months. He also expects a more substantial rate hike after mid-2024.
According to financiers, the uncorking of interest rates will occur and when economies stabilize, alternatives to deposits become not only more profitable, but also less risky and begin to attract the saved money. Former Finance Minister Milen Velchev is convinced that the increase in interest rates will be smooth and will not cause a boom in bad loans, as some financiers fear.
All this recently grist to the mill of those who explain that there have been major structural changes in the economies since the 1990s. And if then simply raising interest rates could tame inflation quickly, today it is much slower, more difficult and smoother.
2023-07-10 05:00:00
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