Bulgaria’s central bank outlines scenarios of effects on inflation from the war in the Middle East
Bulgarian National Bank (BNB) has prepared a baseline and two adverse scenarios, assessing the possible impact on inflation in Bulgaria from the increase in international prices of energy raw materials resulting from the military conflict in the Middle East, the central bank said on March 27.
The military conflict in the Middle East is a source of increased uncertainty regarding the dynamics of international energy commodity prices and, accordingly, the inflation outlook in the euro area and Bulgaria, BNB said.
The baseline macroeconomic scenario for the development of the Bulgarian economy is based on assumptions about the development of the global economic environment and commodity prices as of March 11 2026, the central bank said.
According to the baseline scenario, average annual inflation in Bulgaria is expected to accelerate to 3.7 per cent in 2026, then slow down to 3.2 per cent in 2027 and 2028. The slowdown in inflation in 2027 reflects the effect of the high base in energy prices in 2026, while the planned introduction of the European Emissions Trading Scheme 2 (ETS2) in 2028 has a pro-inflationary impact, the report said.
In view of the increased uncertainty, the baseline scenario is supplemented with two adverse scenarios that illustrate the possible macroeconomic effects of different intensity and duration of shocks on the supply and prices of energy raw materials.
If the adverse scenario were to materialise, the average annual inflation would be higher than that in the baseline scenario by 0.7 percentage points in 2026, by 1.4 percentage points in 2027 and by 0.6 percentage points in 2028.
If the severely adverse scenario were to materialise, average annual inflation would exceed that in the baseline scenario by 1.2 percentage points in 2026, by 3.4 percentage points in 2027, and by 2.3 percentage points in 2028. The higher inflation in this scenario reflects the stronger manifestation of indirect and second-round effects on consumer price components.
BNB noted that the European Central Bank (ECB) Governing Council’s monetary policy meeting held on March 18–19 2026 discussed in detail the potential effects of the Middle East conflict on inflation in the euro area.
Based on available information and current macroeconomic assessments, the Governing Council of the ECB decided unanimously to keep key interest rates unchanged and confirmed its commitment to stabilising inflation at its two per cent target level over the medium term.
The discussion highlighted that the military conflict in the Middle East will have a significant impact on inflation in the short term, mainly through higher energy prices. The medium-term effects will depend on the intensity and duration of the conflict, as well as the extent and speed of the transmission of these shocks to consumer prices and economic activity.
The ECB Governing Council’s decisions on the appropriate monetary policy stance will continue to be based on its assessment of the inflation outlook and the associated risks, based on incoming economic and financial data, underlying inflation developments and the strength of the monetary policy transmission mechanism, BNB’s report said.
The ECB Governing Council is not committing in advance to a specific interest rate trajectory.
The next monetary policy meeting is scheduled for April 29–30 2026.
BNB said that its simulations for the adverse scenarios are illustrative in nature. They do not take into account potential fiscal and monetary policy measures and aim to present the main economic mechanisms through which external price shocks would be transmitted to the Bulgarian economy.
(Photo: European Commission Audiovisual Service)
