The Bulgarian National Bank (BNB) anticipates a gradual slowdown in annual inflation during the second half of the year, as outlined in Issue 2 of its quarterly publication, "Ikonomicheski pregled" (Economic Review), available on the central bank's website.

According to the report, private consumption and rising unit labor costs, particularly in the context of labor shortages, will continue to exert upward pressure on final consumer prices. Despite this, the overall trend is expected to be a deceleration in inflation.

The analysis highlights that the annual growth rate of the Harmonized Index of Consumer Prices (HICP) decreased to 2.8 percent in June. This slowdown is largely attributed to a base effect, resulting from high consumer price growth rates in 2023, especially in the service and food sectors. However, domestic factors such as rising labor costs and strong consumer demand remained significant contributors to inflation. In June, the largest contributors to headline inflation were services, goods and services with administratively set prices, and tobacco products, followed by food items.

The BNB report provides an overview of balance of payments flows, monetary and credit aggregates, and their interactions with the real economy and price stability. It also examines trends in the international economic environment, which directly affect the Bulgarian economy. The data used in this analysis was current as of July 15, and the short-term economic outlook for Bulgaria, through the fourth quarter, is based on the BNB's macroeconomic forecast as of June 26.

In the first quarter of the year, Bulgaria's real GDP grew by 0.4 percent compared to the previous quarter, with annual economic activity growth accelerating slightly to 1.9 percent. Domestic demand was the main driver of GDP growth, with a smaller contribution from net exports, while changes in inventories had a negative impact. Gross value added increased by 3.3 percent year-on-year, driven by growth in the services, industry, and agriculture sectors. Employment also rose by 0.7 percent, primarily due to the services sector, with labor shortages continuing to drive real wage increases.

The BNB's composite economic activity indicator suggests that real GDP growth will slightly accelerate in the second quarter, setting the stage for similar dynamics in the annual growth rate. The third and fourth quarters are expected to see continued GDP growth, driven mainly by domestic demand and improved prospects for external demand for Bulgarian goods and services.

The report also notes that, during the first five months of the year, the annual growth of deposits in the banking system remained strong, reaching 9.3 percent by the end of May. Household deposits were the main contributors to this growth, reflecting strong labor income growth and a preference for savings. Household deposit growth accelerated to 11.7 percent year-on-year.

From January to May, credit growth for non-financial enterprises saw a slight acceleration, influenced by increased company overdrafts. Household credit growth also continued to rise, reaching 18.8 percent in May, with housing loans and consumer loans driving this trend. Rising labor incomes and low interest rates on housing loans were key factors supporting household credit demand. On the supply side, high liquidity, stable bank capital positions, and competition among banks helped to mitigate the impact of the European Central Bank's tighter monetary policy and the BNB's higher minimum reserve requirements on interest rates for household loans.