Recently, the Bulgarian National Bank reduced the basic interest rate to 0%. This move, however, will not influence significantly the interest rates on bank credits. BNB is basically following the monetary policy line of the European Central Bank, economic expert Lachezar Bogdanov from Industry Watch told Radio Bulgaria. Bulgaria is in an area where capital flows move freely, which means that all financial institutions can easily shift their money from one place to another. Apparently, a model where the ECB follows a policy of negative interest rates and other central banks attract funds with positive rates would not be steadfast. A possible margin in the interest rates would only trigger speculative money transfers, Lachezar Bogdanov said.

In Mr. Bogdanov's view, mortgage lending is the only field which has been developing relatively well in recent years. However, the commercial banks would not make swift changes to their lending policy before the end of the quality asset review in the second half of 2016. The real financial condition of the banks must be made public and then they can start planning their long-term credit strategies, Lachezar Bogdanov says, adding:

“Interest rates on mortgage loans extended in the recent months are fairly low and fell permanently below 5%. This is a very low level for countries like Bulgaria. Let us not forget that the Bulgarian cabinet pays a 2.5%-3% interest on its long-term obligations. In other words, we can't expect that the regular citizens would be offered better rates than the ones paid by the authorities, because they may lose their jobs or be found to be swindlers. We must take into consideration where we live. Obviously, Bulgaria could not be compared to Germany, the Netherlands or Japan and people in this country would pay a higher risk premium in the years to come.” 

Are Bulgarian citizens going to stick to their conservative strategies and continue keeping their money in bank deposits with almost zero profitability, or the number of those who choose riskier and more lucrative financial instruments such as shares or mutual bonds would rise?

“Confidence is the biggest problem of the Bulgarian market. The confidence towards those who offer alternative financial products is still insufficient. On the other hand, people do not have enough knowledge of these financial products. That is why few Bulgarians only decide to deprive themselves of the security of the bank deposits. This behavior will continue, because financial culture and knowledge are very difficult to change. It would not be altered in a short period of one or two years of negative or zero interest rates. The development of a new financial culture takes decades rather.”

Are people inclined to spend some of their bank savings due to the improved economic conjuncture in Bulgaria and lower unemployment?

“Consumption rate changes slowly. In many cases this term is related to the purchase of tangible assets such as real estate properties or furnishing. This type of purchase is more susceptible to the business cycle and in periods of economic upsurge and low unemployment we can expect higher purchases of tangible assets. However, speaking of purchase of traditional perishable goods, we will not witness any significant changes, regardless of the economic picture.”

What will happen with the huge amount of EUR 20 billion kept in bank deposits if commercial banks decide at some point to introduce negative rates, just like in some other European countries?

“This is an artificial drama. Currently, many people keep money in bank accounts which do not pay any interest rates whatsoever, but at the same time the banks charge commissions and fees to keep those accounts active. Moreover, many people keep their money in bank safety-vaults and also pay money for that service. Practically, this is a negative profitability, i.e. people pay, in order to keep their money safe. So, those who are more conservative and want to keep their savings would not look for an alternative option and they can find such, because the whole Eurozone is trapped by the negative interest rates.”

English version: Kostadin Atanasov