HNB Council: Continued Growth of Loans to Households and Enterprises

The Council of the Croatian National Bank discussed current economic and financial developments at today’s meeting and adopted the monetary policy projection and the Semi-Annual Information on the financial situation, the degree of price stability achievement, and the implementation of monetary policy in the first half of 2022. The Council also made several other decisions within its jurisdiction.

Weaker prospects for global economic growth and pronounced inflationary pressures have prompted central banks around the world to rapidly and significantly tighten monetary policy, which has increasingly had an unfavorable impact on the Croatian economy. Negative external shocks have so far affected the domestic manufacturing sector more due to its sensitivity to high energy costs and constraints in global supply chains.

In contrast, the services sector has so far overcome the difficulties that have affected the world thanks to strong demand following the lifting of most epidemiological measures. Under such conditions, Croatia’s real GDP decreased in the third quarter compared to the previous quarter, causing its annual growth rate to slow to 5.2 percent, with a likely continuation of weakening economic activity until the end of the year.

Consumer price inflation in the first ten months of 2022 noticeably accelerated, reaching 13.2 percent year-on-year in October. The acceleration of domestic producer and consumer prices is primarily the result of high energy prices and food and industrial raw materials on the global market, and pressures arising from still partially present disruptions in global supply chains have also acted in the same direction. The acceleration of inflation was also contributed to by strong demand for services following the lifting of epidemiological measures, which largely relates to tourist demand from non-residents. At the same time, the increase in demand for tourist services occurs in conditions of rising input costs, a shortage of qualified labor, and rising wages in hospitality.

The intensity of the overall price level growth has been somewhat mitigated by the price caps on some energy sources and basic food products. The increase in energy prices worsened the goods account balance in the third quarter, but the effect of that deterioration on the overall balance of the current and capital accounts was largely mitigated by exceptionally good results achieved in the tourism sector.

The shift in the monetary policies of leading economies has begun to gradually reflect on the growth of domestic interest rates. Thus, the growth of yields on government debt securities continued, financing costs for enterprises began to rise, while no significant change in financial conditions is yet noticeable in household lending. In the process of Croatia’s entry into the euro area, due to the alignment of monetary instruments, the excess liquidity of the domestic banking sector will increase, which will mitigate the deterioration of financing conditions for the domestic economy due to the expected tightening of the ECB’s monetary policy.

Overall financing of enterprises continued to accelerate on an annual basis, primarily reflecting the intensification of borrowing from domestic credit institutions. At the same time, the growth of placements to households continued, with the majority of household credit activity still relating to housing loans. The exchange rate of the kuna against the euro was stable, so there was no need for foreign exchange interventions by the HNB. During the summer months, appreciation pressures emerged, but they were mitigated by occasional demand from enterprises for foreign currencies, particularly pronounced in the energy sector due to more expensive raw materials and energy sources. Participation in the European exchange rate mechanism and the imminent introduction of the euro further anchored market expectations regarding exchange rate movements.

As part of the preparations for the introduction of the euro, the Council of the Croatian National Bank, at a meeting held on December 7, 2022, adopted the Decision on the implementation of monetary policy operations and the Decision on the rules for releasing liquidity in US dollars, effective from January 1, 2023. These decisions implement the guidelines of the European Central Bank into national regulations, which regulate the conduct of monetary policy operations of the Eurozone.

The HNB Council also considered the latest assessments and projections of key macroeconomic variables, which, given that Croatia will soon become a member of the euro area, were prepared for the first time taking into account the assumptions and procedures of the European Central Bank (ECB). Following established practices of the Eurozone, the governor of the HNB will present macroeconomic projections for Croatia to the domestic public after the ECB publishes macroeconomic projections for the euro area.

The HNB Council has given consent to the Supervisory Board of Partner Bank for Petar Repušić to perform the function of CEO, and Luka Čulo the function of a member of the management board of that bank.