MACROECONOMICS
Economic Report
The Impact of Inflation on Interest
Rates and Housing Prices in Bulgaria,
2019-2023
Macroeconomics Economic Report
Table of Contents
Introduction................................................................................................................................................... 2
Definition of main terms ............................................................................................................................... 3
Development of inflation in Bulgaria, 2019-2023 ......................................................................................... 3
Development of interest rates in Bulgaria, 2019-2023 ................................................................................. 5
Development of housing prices in Bulgaria, 2019-2023 ............................................................................... 6
Conclusion ..................................................................................................................................................... 8
Bibliography .................................................................................................................................................. 9
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Macroeconomics Economic Report
Introduction
This report aims to explore the development of inflation, interest rates, and housing prices in Bulgaria for
the period 2019-2023. Bulgaria, like many other countries, had to deal with the economic consequences
of the COVID-19 pandemic during that period. This is why I will specifically look at the progress of
inflation rates (measured by the Consumer Price Index) during this crisis and the following effect on
interest rates and housing prices (measured by the Base Interest Rate and the House Price Index,
respectively).
I begin the report by defining some of the main economic variables that will be analyzed.
Inflation is then explored through diverse influences, including political instability, global market
fluctuations, and the effect of the COVID-19 pandemic.
Interest rates, a tool operated by central banks, are examined within the context of Bulgaria’s currency
board arrangement, pegged to the euro. The report analyzes the relationship between Bulgaria’s
monetary policy, the European Central Bank’s decisions, as well as their impact on borrowing costs and
economic activity.
Additionally, the report sheds light on Bulgaria’s housing market, presenting the remarkable rise in house
prices. Factors such as increased demand, low credit rates, and shifting investment preferences are
analyzed to explain the housing market dynamics.
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Macroeconomics Economic Report
Definition of main terms
Inflation
Inflation is the increase in the overall level of prices. To measure the level of prices, data from the
Consumer Price Index (CPI) will be presented in this report. The CPI uses a basket of goods and services
as a representative to measure the overall change in the price level.
Interest rates
The interest rate represents the percentage of money an individual is charged for borrowing money.
Base Interest Rate (BIR) is the interest rate set by a country’s central bank. The Base Interest Rate reflects
the central bank’s stance regarding the overall level of the country's economy.
Housing price index (HPI)
House price indexes measure the inflation or deflation of the price of houses over a period of time. The
indexes describe the change in prices between a specific period and a base period1.
Development of inflation in Bulgaria, 2019-2023
Bulgaria’s inflation was influenced by numerous factors, including the global spike in energy and food
prices, political instability, and disruptions in the global supply chains. Nevertheless, inflation in Bulgaria
remained moderate, compared to other European countries.
Figure 1 presents the annual average Consumer
Price Index in Bulgaria, taking the previous year's
value as 100. The figure shows that inflation
soared to 15.3 percent in September 2022, after it
had remained under 3.3 percent the previous
three years.
Figure 1: Annual average CPI in Bulgaria, previous
year = 100, 2019-2022
18,0
15,3
16,0
14,0
12,0
%
Pre-COVID-19 inflation rates remained around 3%.
10,0
As the pandemic pervaded the world, consumer
8,0
confidence (how consumers feel about the state
6,0
3,3
3,1
4,0
of the economy) declined due to economic
1,7
2,0
uncertainty. People reduced spending, which
0,0
decreased demand and lowered prices. The
2019
2020
2021
2022
government implemented policies to prevent
price increases, which explains the negative Source: National Statistical Institute. Consumer Price Indices (CPI); Annual
average CPI, Previous Year =100
inflation rate during 2020, as shown in Figure 2.
1
Australian Bureau of Statistics (2023); Chapter 5 House Price Indexes [URL:
https://www.abs.gov.au/AUSSTATS/abs@.nsf/39433889d406eeb9ca2570610019e9a5/bb8cbed40ba69992ca257d5f0018a5c8!O
penDocument ]
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Macroeconomics Economic Report
Figure 2: CPI in Bulgaria, September 2019 - September 2020
5
3,8
4
3,1
1,7
0,9
%
2
annual inflation, %
2,5
3
1
1
0,4
0
-0,3
-1
-0,6
-0,5
-1
-2
-0,5
-1,1
сен.19 окт.19 ноя.19 дек.19 янв.20 фев.20 мар.20 апр.20 май.20 июн.20 июл.20 авг.20 сен.20
Source: National Statistical Institute. Consumer Price Indices (CPI). Annual inflation measured by Consumer Price Index,
December of the previous year =100
Many of the countries affected by the pandemic managed to reduce inflation by implementing stimulus
packages at an early stage. Bulgaria took time to implement such measures, which turned out to be not
so efficient, due to the ongoing political instability. On the other hand, global trade disruptions emerged
resulting from many businesses going into lockdown and slowing the production of goods and their
transportation. Higher freight rates affected import and export prices of goods, which contributed to the
increasing inflation in 2022. This increase was further intensified by Russia’s war in Ukraine and the
following rise in international commodity prices.2 All these factors led to inflation in Bulgaria peaking at
18.7% in September 2022 (Figure 3), marking its highest level in the last 20 years.
20
15
18,7
Figure 3: CPI in Bulgaria, September 2022 - September 2023
17,6
16,9
16,9
16,7
annual inflation, %
16
14
11,6
%
10,1
10
8,7
8,5
7,7
6,3
5
0
сен.22 окт.22 ноя.22 дек.22 янв.23 фев.23 мар.23 апр.23 май.23 июн.23 июл.23 авг.23 сен.23
Source: National Statistical Institute. Consumer Price Indices (CPI). Annual inflation measured by Consumer Price Index,
December of the previous year = 100
2
China CEE Institute (June 2023) “Bulgaria economy briefing: Inflation in Bulgaria is decreasing, but it is still twice
as high as in the Eu” [URL: https://china-cee.eu/2023/07/03/bulgaria-economy-briefing-inflation-in-bulgaria-isdecreasing-but-it-is-still-twice-as-high-as-in-the-eu/]
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Macroeconomics Economic Report
Development of interest rates in Bulgaria, 2019-2023
Bulgaria has a currency board arrangement, which means that its currency (Bulgarian lev) is pegged to
the euro at a fixed exchange rate. This implies that Bulgaria cannot pursue an independent monetary
policy and is bound by the monetary policy and interest rate decisions of the European Central Bank. The
country is on its path of adopting the euro, which would then offer it “a set at the table when the ECB
determines monetary policy for all euro area members.”3
The Bulgarian National Bank kept its Base Interest Rate at 0% until September 2022, followed by an
increase to 0.5% a month later, as can be seen in Figure 4. As inflation rates started to increase during
2022, the Bulgarian National Bank decided to increase the Base Interest Rate, also because of the
European Central Bank raising the key interest rates. The Base interest rate has been gradually increasing
since October 2022, reaching 3.64% in October 2023. Central banks use the Base Interest Rate as a tool
to influence economic activity, including inflation. When the interest rate is raised, borrowing becomes
more expensive for consumers and businesses. As a result, spending and investment are reduced, which
slows economic growth and inflationary pressures. The European Central Bank is expected to keep
raising the interest rates, which implies that the Bulgarian National Bank will follow its actions by raising
the interest rates in Bulgaria. Nevertheless, the measures taken by the Bulgarian National Bank are
expected to lower inflation in the upcoming years.
Figure 4: Base Interest Rate (BIS) for Bulgaria, 2019-2023
4,00
3,50
3,00
%
2,50
2,00
1,50
1,00
0,50
0,00
Source: Bulgarian National Bank (2023); Base Interest Rate (BIR)
3
International Monetary Fund (2022), Alfred Kammer: “Speaking Points for the conference on Bulgaria in the Eurozone –
Advantages and Opportunities”. [URL: https://www.imf.org/en/News/Articles/2022/12/09/sp-remarks-at-the-conference-onbulgaria-in-eurozone]
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Macroeconomics Economic Report
Development of housing prices in Bulgaria, 2019-2023
The Bulgarian housing market was characterized by unseen price increases, low credit rates, and
increased demand. In 2022, the nationwide house price index rose sharply to 13.79%, which marks the
strongest house price growth since 2008. Table 1 presents data on the annual change in the Housing
Price Index (HPI) for the period 2019 to 2022. The following results were calculated by subtracting the
HPI for the previous year from the HPI for the current year, dividing the following number by the HPI for
the previous year, and multiplying the result by 100 to get the percentage change. These calculations
show that in real terms, house prices actually fell by 2.4%. This was due to the soaring inflation during
2022, which rose to 18.7% in September that year.4
Table 1: House price index, annual change (%), 2019-2022
Year
Rate of change
Rate of change, deflated
2019
6.02%
3.9%
2020
4.56%
5.2%
2021
8.67%
2.5%
2022
13.79%
-2.4%
Source: National Statistical Institute of Bulgaria (2023); House price indices (HPI), national level
For several years now, demand has outpaced supply. Banks in Bulgaria are introducing payments for
large amounts of deposits, making keeping money in a bank unprofitable. As bank deposits start to bring
negative profitability, real estate becomes a profitable investment. Along with the increase in the level of
wages in Bulgaria, and the high inflation rates making people want to protect their savings, all these
factors result in more and more people seeking refuge in buying real estate assets.
Figure 5 presents the quarterly increase in HPI using 2015 prices as base prices, while also showing the
percentage change for every quarter. The data shows that housing prices are still rising in the first two
quarters of 2023, as opposed to housing prices in the EU, which fell by 1.1% in the second quarter of this
year5. The main reason for this development is the lower interest rates in Bulgaria. While the Bulgarian
National Bank follows the monetary policy decisions taken by the European Central Bank, it does so with
a certain delay. That keeps the cost of borrowing among the lowest in Europe, further increasing
demand.
4
Delmendo, L. (December 2022) “Bulgaria Residential Real Estate Market Analysis 2022”, Global Property Guide
[URL: https://www.globalpropertyguide.com/europe/bulgaria/price-history]
5
Eurostat (2023). House Prices – Quarterly and annual rates of change, 2022Q3-2023Q2 [URL:
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Housing_price_statistics__house_price_index#Annual_and_quarterly_growth_rates ]
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Macroeconomics Economic Report
Figure 5:Housing Price Index (HPI) in Bulgaria, 20192023 (in quarters of the year); 2015=100
190
6
change
180
5
HPI
4
170
%
2
150
%
3
160
1
140
0
130
-1
120
-2
І
IІ IIІ IV
2019
І
IІ IIІ IV
2020
І
IІ IIІ IV І
IІ IIІ IV
І
IІ
2021
2022
2023
Source: Eurostat (2023), House price index, deflated - annual data. (online data code:
tipsho10)
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Macroeconomics Economic Report
Conclusion
In conclusion, the years from 2019 to 2023 marked significant shifts in key economic indicators in
Bulgaria, including inflation, interest rates, and housing prices. These factors were the primary forces
that determined the economic development of the country during that period.
The analysis of the Consumer Price Index revealed a meaningful link between external and internal
factors. The COVID-19 pandemic initially led to a decline in consumer confidence and reduced spending,
which resulted in negative inflation rates in 2020. However, disruptions in global supply chains, rising
commodity prices, and the Russian-Ukrainian war pushed inflation to its highest level since 2000,
reaching 18.7% in September 2022. Bulgaria, like many other countries, faced challenges in easing these
inflationary pressures, complicated further by the political instability in the country.
The development of interest rates showed Bulgaria’s compliance with the European Central Bank’s
policies due to its currency board agreement. The Base Interest Rate, which remained at 0% until
September 2022, increased to 0.5% and continued to increase steadily, reaching 3.64% in October 2023.
This increase aimed to reduce the inflationary pressures by making borrowing more expensive and
lowering spending and investment as a result.
High inflation, increasing demand, and low mortgage rates all contributed to the remarkable growth of
the Bulgarian housing market. Despite the challenges faced by other European countries, Bulgaria’s
housing prices continued to rise in the first two quarters of 2023, partly due to the delayed impact of the
lower interest rates. Real estate consequently became an attractive investment option, especially
considering the negative profitability of bank deposits and the low mortgage rates.
These economic indicators revealed Bulgaria’s response to both global and domestic economic factors.
These challenges are worth mentioning as the country looks towards adopting the euro in the future,
which might have potential economic stability implications.
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Macroeconomics Economic Report
Bibliography
Databases
Bulgarian National Bank (2023). Statistics. Base interest Rate (data file: Base_Interest_Rate.xls)
Eurostat (2023); House price index, deflated – annual data (online data code: tipsho10)
Republic of Bulgaria National Statistical Institute (2023). Consumer Price Indices (CPI). Annual average
CPI, Previous Year =100 (time series:
https://www.nsi.bg/sites/default/files/files/data/timeseries/CPI_1.6_EN.xls)
Republic of Bulgaria National Statistical Institute (2023). Consumer Price Indices (CPI). CPI, December of
the previous year =100 (time series:
https://www.nsi.bg/sites/default/files/files/data/timeseries/CPI_1.3_EN.xls)
Republic of Bulgaria National Statistical Institute (2023). House price indices (HPI), national level; HPI,
national level, 2015=100 (time series:
https://www.nsi.bg/sites/default/files/files/data/timeseries/HPI_1.1_en.xls)
Articles
Australian Bureau of Statistics (2023); Chapter 5 House Price Indexes [URL:
https://www.abs.gov.au/AUSSTATS/abs@.nsf/39433889d406eeb9ca2570610019e9a5/bb8cbed40ba699
92ca257d5f0018a5c8!OpenDocument]
China CEE Institute (June 2023) “Bulgaria economy briefing: Inflation in Bulgaria is decreasing, but it is
still twice as high as in the Eu” [URL: https://china-cee.eu/2023/07/03/bulgaria-economy-briefinginflation-in-bulgaria-is-decreasing-but-it-is-still-twice-as-high-as-in-the-eu/]
Delmendo, L. (December 2022) “Bulgaria Residential Real Estate Market Analysis 2022”, Global Property
Guide [URL: https://www.globalpropertyguide.com/europe/bulgaria/price-history]
Kammer, A. (2022), “Speaking Points for the conference on Bulgaria in the Eurozone – Advantages and
Opportunities”. International Monetary Fund [URL:
https://www.imf.org/en/News/Articles/2022/12/09/sp-remarks-at-the-conference-on-bulgaria-ineurozone]
Nguyen, Takizawa and Vassileva (Sep 2023). “Inflation Dynamics in Bulgaria: The Role of Policies”
International Monetary Fund
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