At its Wednesday meeting the Council of the Croatian National Bank reviewed recent economic and monetary developments and the quarterly report on the banking system. The Council was also briefed about the final report on the on-site examination of the foreign exchange operations in Riječka banka and made a number of decisions acting in accordance with its authority.

In the third quarter gross domestic product grew by 6.5 percent reaching a cumulative year-on-year growth rate of 5 percent in the first nine months. Industrial production grew 5.4 percent year-on-year in November and high growth rates were also recorded in some other economic sectors. Registered unemployment was 0.6 percent lower in November than a year ago, but real net wages were about 4.4 percent higher. In December, retail prices grew by 0.1 percent, so that the inflation measured by the year-on-year rate of change in the RPI was as low as 2.3 percent. Core inflation for 2002 stood at 1.2 percent, while producer prices grew by 2.3 percent.

As opposed to these favorable indicators, foreign trade deficit grew significantly (the year-on-year growth in the first eleven months was 27.2 percent). Very high growth rates were also observed in bank credits (at end-November credits to households were 40.3 percent and corporate credits 21.4 percent higher than in the same month previous year). Considering that the growth in bank placements is based on the growth in foreign liabilities rather than on domestic deposits, it is clear that the increased domestic consumption is financed by foreign bank borrowing. This has a disturbing impact on the balance of payments and the external debt growth, and temporarily generates strong appreciation pressures. A continuation of such trend could threaten macroeconomic stability.

According to the central bank estimates, an annual increase in placements of 16 percent would be enough to support further economic growth, without putting too much pressure on the balance of payments and foreign borrowing. It was therefore decided that banks whose placements grew more than: 4 percent by end-March, 8 percent by end-June, 12 percent by end-September or 16 percent by the end of the year, should be obliged to purchase CNB bills to the amount twice as high as the amount in excess of the above mentioned rates. The maturity of the purchased bills will be 91 days, with the annual interest rate of 0.50 percent. However, the central bank will not repurchase them or accept them as collateral for a Lombard loan, neither will the banks be allowed to sell them to another party before maturity.

As of the beginning of February, the decision that obliged banks to maintain a minimum 53 percent coverage of their foreign exchange liabilities by the foreign exchange claims ceases to be valid. Instead of that, a new decision prescribes a minimum of 35 percent coverage of the extended base, and that coverage will have to be maintained on a daily basis. The former decision allowed some evasions in the way that banks ensured the prescribed claims/liabilities ratio only on the last day of the month by taking on short-term loans abroad. As certain banks are not capable of meeting the new requirements immediately, there will be a transition period for gradual adjustment.

The remuneration paid by the Croatian National Bank for the kuna part of the reserve requirements was reduced from 1.75 percent to 1.50 percent. This change was based on a decrease in deposit interest rates of banks (the average interest rate on kuna deposits not indexed to a foreign currency was 1.58 percent, of which only 1.28 percent on deposits of legal entities), as well as on a decrease in interest rates in interbank trading (over the last three months the interest rate on overnight loans ranged between 0.24 percent and 3 percent; in December, the average overnight rate on the Zagreb Money Market stood at 1.8 percent, and was half as high in direct interbank trading).

Pursuant to the amendment to the Decision regulating the issue of the approval to a domestic person for holding foreign exchange deposits in an account abroad, such approval can only be given to the applicants who have no unsettled balances in their domestic regular operations accounts.

The CNB Council agreed to the proposal of the Supervisory Board of Privredna banka Zagreb d.d. to nominate Božo Prka for a second term of office as chairman of the Management Board of that bank, with Ivan Gerovac, Davor Holjevac, Tomislav Lazarić, Giancarlo Mirande and Draženko Pavlinić as the Management Board members.

Zagrebačka banka d.d. Zagreb was given prior approval for a merger with Cassa di Risparmio di Trieste- Banca d.d. Zagreb. As both financial institutions belong to the same banking group, this merger is not going to change the ownership structure of the banking system.