At its today session, the Council of the Croatian National Bank has been briefed about current economic, monetary and financial developments in the euro area and Croatia, analysed systemic financial risks and adopted several decisions on matters falling within its competence.

Total financial system risk exposure fell slightly towards the end of last year, with a more favourable macroeconomic outlook over a short-term amid robust domestic economic activity and considerable easing of the inflationary pressures. The main risks to financial stability continue to stem from geopolitical uncertainty, sluggish activity in the euro area and financing conditions tightening.

A further gradual drop in the turnover on the residential real estate market resulted in a stabilisation of the prices on this market in the third quarter of last year. Yet, the risk of a sharp turn in the residential real estate market is mitigated by a robust labour market, rising income and a relatively slow growth in the interest rates on new housing loans. Particularly marked is the fall in foreign demand for residential real estate while the number of new housing loans has fallen only moderately, with loan amounts rising steadily. At the same time, the growth in cash loans accelerated considerably driven by growing consumer optimism, while the demand of corporates for new financing was subdued amid smaller needs for working capital financing and financing conditions tightening.

The banking sector remains highly liquid and capitalised, with further improvement in banks’ credit portfolio quality and with profitability hovering at historical highs, largely owing to the growth in interest income on short-term highly liquid assets. However, the growth in interest expenses triggered by growth in interest rates on time deposits, which started spilling towards the end of 2023 to household deposits, is expected to diminish bank profitability. The increase in the costs of sources of bank financing will also raise the national reference rate (NRR) and gradually also the interest rates on the part of the existing household loans and bank interest income, however, this increase will be smaller than the increase in interest expenses.

In the mature phase of the financial cycle, it is important to preserve a good level of bank capitalisation so as to achieve bank resilience in case the accumulated systemic risks materialise. Therefore, a higher countercyclical buffer rate of 1% has been applied since the beginning of the year, to be raised to 1.5% from 30 June. In the context of the regular annual review, the CNB also increased total capital buffers for seven existing other systemically important institutions.