Bulgaria's Banking System to Maintain High Liquidity in Q2, Q3 - C-Bank

Bulgaria's Banking System to Maintain High Liquidity in Q2, Q3 - C-Bank

Bulgaria's central bank expects the country's banking system to maintain high liquidity in the second and the third quarter of the year, it said.

The relatively high growth of funds attracted from residents in the banking system is expected to remain unchanged in the second and third quarters, which will be reflected in maintaining high banking system liquidity and in an increase in banks' net foreign assets, the National Bank of Bulgaria (BNB) said in its quarterly Economic Review Summaries report.

BNB also said it expects a slight increase in lending to the non-government sector in the light of the gradual increase of economic activity in Bulgaria.

On a quarterly basis, economic activity in Bulgaria is expected to slightly increase over the second and third quarters of 2014, BNB said. Domestic demand will gradually recover, contributing positively to growth as a result of the moderate recovery of private consumption and fixed capital formation.

Despite the improved economic situation in Bulgaria’s major trading partners, external environment continues to pose risks to domestic economic growth, BNB noted.

"Another source of uncertainty to our projections relates to deflationary processes in Bulgaria observed since the third quarter of 2013," the central bank said. "In case of a prolonged period of declines in the overall price level, households and firms are likely to generate expectations for retention of this trend in the future, which could depress consumption and investment due to postponement of expenditure."

In line with the 2014 State Budget Law parameters and social expenditure developments observed since early 2014, it may be expected that fiscal policy will affect the economic activity mainly through increasing household disposable income from budget social transfers, BNB also said.

In the second and third quarters of 2014 government consumption is expected to have a positive, though limited, contribution to GDP growth, whereas the rate of decline of the overall harmonised index of consumer prices (HICP) is expected to gradually moderate, reflecting mainly the lower negative contribution of controlled prices and the suspended fall in food prices.

Major risks to this projection relate mainly to the uncertainty surrounding international food and oil price developments and could be materialised both upwards and downwards, while potential adjustments in administratively controlled prices are among internal factors posing inflationary pressure, it noted. A continued decline in oil prices and international food prices, together with a weakening or sluggish consumer demand rate may result in a sustained rate of decline in overall HICP.

The risks to the expected inflation outlook are assessed as balanced, BNB said.

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