As Poslovni Dnevnik/Tina Lakic writes, the Croatian National Bank has stated that statistical indicators show that current economic growth strengthened earlier this year. But at the same time there was a visible weakening of consumer confidence, which remained relatively low in April, despite a slight recovery. As such, employment growth stopped in March, although nominal wages are growing more rapidly.
They also referred to the ongoing price hikes when it comes to both food and energy prices.
“Rising prices for oil, food and raw materials on global markets, partly affected by the war in Ukraine, are spilling over into Croatian prices of petroleum products and food, so inflation accelerated significantly during March. Due to the expected change in the monetary policy direction of the central banks of the largest economic areas, the increase in short-term and long-term government financing costs continued, and interest rates on corporate loans also rose slightly. In such conditions, the growth of placements to non-financial corporations accelerated sharply, while placements to households continued to increase at stable rates, reflecting mainly strong housing loans.
Increased systemic risks
The overall exposure of the Croatian financial system to systemic risks has increased due to the war in Ukraine and sanctions placed against Russia, and when it comes to the Croatian economy in particular, these effects are largely seen in movements in raw material and other commodity prices on both global and regional markets. Pandemic-related uncertainties, as well as recent geopolitical tensions, have so far not threatened the stability of Croatia’s financial sector. An important role was played by the overall good liquidity and capitalisation of the banking sector, which is also supported by the protective layers of capital built so far,” they stated from the CNB’s Council.
Challenges and risks for the Croatian financial system in the coming period are related to the development of geopolitical instabilities and inflationary pressures, as well as the effects of the expected normalisation of monetary policy and the continued rise in housing prices. The duration of the ongoing war in Ukraine and the intensity of its consequences will determine the strength of the impact on macroeconomic, fiscal and financial developments. Disruptions in supply chains, which further encourage price increases, can place a major burden on both businesses and households.
Tightening monetary policy and rising Croatian loan interest rates
“In the context of rising inflation, monetary policies are expected to tighten with the raising of key interest rates of central banks in the largest economic areas. This will gradually increase the cost of new borrowing as well as the debt repayment burden for existing debtors with variable interest rates. The possible adverse effects of Croatian loan interest rates and their increasing on the financial system are being mitigated by the tendency to reduce total household and corporate indebtedness with a relatively low level of household debt and a small number of loans with which repayments could increase significantly. In addition to that, the expected introduction of the euro in 2023 could further mitigate the growth of the price of new borrowing for the state, as well as for other sectors.
Tightening up financing conditions in international financial markets, and then raising Croatian loan interest rates, could mitigate some of the risks to financial stability that have intensified over a long period of low interest rates, such as strong private sector borrowing, low bank profitability and the search for risky alternatives which still do offer higher rates of return. Such is the risk associated with the strong rise in residential property prices, which is supported, among other things, by a large volume of housing loans,” they said from the CNB.
The property market is under a magnifying glass
The CNB continuously monitors and analyses the development of systemic vulnerabilities in order to be able to act on them if necessary with measures within its competence.
Thus, at the beginning of 2022, it was announced that they’d raise the countercyclical buffer rate, which will further strengthen the resilience of credit institutions to possible losses associated with exposure to cyclical systemic risks in the downward phase of the financial cycle or in the event of a sudden crisis. The CNB continues to closely monitor lending conditions at the level of individual debtors, so that potential sources of systemic risks can be diagnosed in a timely manner and measures can be taken to mitigate them, including prescribing stricter consumer lending conditions.
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