Adrović: We Should Favor Borrowing with Fixed Interest Rates

After a series of external shocks that marked 2020 and 2021, signs of optimism and economic recovery began to emerge at the end of last year. However, such expectations were quickly dashed by a new unexpected external shock, the Russian aggression against Ukraine, which brought additional problems to supply chains, increased energy prices, and further fueled inflation. Is there still room for optimism, can monetary policy mitigate inflation without triggering a recession, when will the European Central Bank tighten monetary policy, and what does Croatia’s entry into the euro area next year mean for banks and consumers, are some of the topics we discussed with Zdenko Adrović, director of the Croatian Banking Association.

When we spoke a year ago, the then data on economic activity in Croatia sparked optimism. However, this year, epidemiological problems have been replaced by geopolitical and war-related issues. Is there still room for optimism? What do you predict for the year ahead?

– At this moment, we can only conclude that the overall economic situation is unpredictable and depends on a number of factors. Over the past two years, we have had the opportunity to see how external shocks and crises operate, but also the strength of an economy that has largely managed to fight and recover despite all negative circumstances. The war in Ukraine is a new tragedy that the world is facing, and the social and economic consequences are currently unpredictable and, unfortunately, we will only feel them later. At the same time, the consequence of all the economic shocks occurring is the phenomenon of rising prices of all raw materials, primarily energy, but also food, transport, packaging, and all services. The tourist season will also be important for Croatia, which so far looks promising, and we are in the final preparations for the introduction of the euro, which has prompted several quality economic and structural policies. We must believe that the global situation will stabilize, but we have already proven that even under such conditions there are models and ways to effectively face challenges and threats.

At that time, it did not seem that inflation would reach these levels. When could we earliest expect to have more acceptable inflation rates again, what do you expect?

– Everything depends on how energy prices will move; they are the main cause of current inflation. The strengthening of the dollar against the euro has also influenced this to some extent, but the main influence comes from global energy prices that spill over into transport and food prices, and then into other prices. It is clear that these prices are quite unpredictable. Institutions with the greatest forecasting capacities, such as major central banks, have failed to predict this inflation because no one was able to foresee the consequences of reopening after lockdown, the start of the war in Ukraine, and problems in supply chains, nor the ongoing lockdown in major Chinese cities and ports. Therefore, we can only say that inflation could calm down towards the end of the year, and that is if there are no further shocks, but, I repeat, no one can predict them.

Excessive increases in interest rates could slow down the economy too much and trigger a recession, which is why it is expected that this will be done gradually. What do you estimate, how could they be gradually raised and by how much?

– The ECB will do everything to avoid the impact of restrictive monetary policy on slowing down the economy because the slowdown is evident. I do not expect anything similar to what is happening in the US, where the central bank’s reference interest rates have already been raised to a range of 0.75 to 1 percent. The ECB will seriously consider raising interest rates from the summer, and if that happens, the increase will be gradual and more moderate. Within the ECB, there are so-called hawks and doves, who view the pace of interest rate hikes differently.

And what will all this ultimately mean for consumers, those who have loans or who will take them out? How much could interest rates rise?

– I repeat, at this moment we simply cannot predict with sufficient quality. There is currently no significant pressure on interest rates, but the fact is that there is a risk of interest rate increases. Everyone should act accordingly, which means that borrowing with fixed interest rates should be favored. To protect their clients and their own portfolios, most banks currently offer only fixed interest rates when contracting non-purpose loans. In contracting long-term loans, consumers who want to avoid exposure to future interest rate movements can choose loans where the interest rate is fixed for the entire repayment period or part of it.

You can read the entire conversation in the new printed and digital edition of Lider.