HNB: Economic Growth Slows, We Are Close to the Peak of Inflation

The Council of the Croatian National Bank discussed current economic and financial trends and noted that the latest economic indicators point to a slight decrease in the level of economic activity in the third quarter compared to the previous one, which could result in a significant slowdown in annual growth in the third quarter.

‒ The latest economic indicators suggest a slight decrease in the level of economic activity in the third compared to the previous quarter, which could result in a significant slowdown in annual growth during the same period ‒ states the press release from the HNB following the meeting of the bank’s Council.

Recall that, according to the first estimate by DZS, Croatia’s gross domestic product in the second quarter increased by 7.7 percent in real terms compared to the same period last year, while on a quarterly basis, i.e., compared to the first quarter, according to seasonally adjusted data, this growth amounted to 2 percent.

As emphasized by the HNB, on a quarterly basis, industrial production, real retail trade turnover, and construction have decreased, and the consumer confidence index remains below the long-term average.

In the period from July to September, there was also a slowdown in the quarterly growth of nominal gross wages, while real net wages continued to decline. At the same time, employment continued to grow, but without a significant reduction in the unemployment rate, the HNB notes.

On the other hand, inflation reached 12.8 percent year-on-year in September, with the growth of all main components of the consumer price index accelerating, except for food, whose annual price growth slightly slowed down under the influence of price controls on certain basic food products.

The tightening of financing conditions in the global financial market has begun to slightly spill over into the increase in interest rates of banks on loans to households and businesses in Croatia, but they remain at relatively low levels.

The growth of total placements of monetary institutions to domestic sectors (excluding the central government) continued to accelerate on an annual basis due to the growth of placements to non-financial companies, particularly in the energy sector. At the same time, the annual growth of placements to households has only slightly slowed down, concludes the press release after the meeting of the HNB Council.

Inflation is expected to fall to two percent in 2024.

The Governor of the Croatian National Bank (HNB) Boris Vujčić emphasized that the latest data indicate that the spread of inflation has begun to decrease for the first time in October and that there are signs that we are close to the peak of inflation.

– From the latest data we have, we see that the spread of inflation has begun to decrease for the first time in October. This is good news and may indicate that we are close to the peak of inflation – emphasized the governor of the HNB, who participated on Thursday in the traditional economists’ consultation on Croatia’s economic policy in 2023.

Vujčić expects the inflation rate to fall next year to a level between six and seven percent, and to return to the targeted two percent in 2024. He also stated that with the entry into the eurozone, Croatian monetary policy, if there are supply-side shocks, such as rising energy or food prices, for example due to the war in Ukraine, cannot do much, as it can only operate on the demand side.

However, he says, part of the inflation also comes from the demand side, and monetary policy reacts to it by raising interest rates and reducing its own balance sheet, i.e., the amount of money or excess liquidity in the financial system that it has created, which he believes will certainly happen next year. Currently, the excess liquidity in the domestic financial system is around 80 billion kuna.

Vujčić stated that Croatia, compared to other countries in Central and Eastern Europe, as well as those outside the eurozone, and even those in the eurozone, has the second-lowest inflation rate, adding that it also has much lower interest rates.

Currently, the Croatian Ministry of Finance is borrowing short-term until January cheaper than the finance ministries of countries with an A rating, so I see no problems, on the contrary, he stated.

For example, the Ministry of Finance borrowed at the last auction of kuna treasury bills in October for a period of six months at an interest rate of only 0.1 percent, and for one year at a rate of 0.2 percent.

In response to a journalist’s question about the increasing cash purchases of real estate ahead of the transition to the euro to possibly avoid controls, Vujčić noted that there is a growing trend of non-financed purchases of real estate. “It is not necessarily cash; some take a deposit from the bank and then buy, while others buy with cash,” he stated.

He also added that there is a tendency to partially take loans for purchasing real estate and partially pay in cash, without loans. This, he says, may be a consequence of the fact that interest rates on deposits have been very low, even negative abroad. Additionally, the share of foreign purchases in the domestic real estate market has increased, and likely part of that effect has materialized through non-financed purchases.

He asserted that part of the increased cash purchases of real estate before the transition to the euro may also be related to controls.

When asked about the oversight of the origin of money, he said that this is regulated by law, whereby the origin of the money must be declared if invested in a bank.