At its session today, the CNB Council analysed the latest monetary and economic developments, adopted the monetary projection for the period from 2017 to 2020 and the Semi-annual Information on the Financial Condition, the Degree of Price Stability Achieved and the Implementation of Monetary Policy in the Second Half of 2016. The Council also adopted several decisions on matters falling within its area of competence.
Economic growth continued at the same pace in early 2017 as in late 2016. The unemployment rate dropped further in the first quarter of the current year, while employment and gross wages rose from the previous quarter. Consumer prices increased at a monthly rate of 0.3% in March, whereas the annual inflation rate decelerated, primarily due to energy and unprocessed food prices. The CNB maintained the stability of the kuna exchange rate against the euro and continued to pursue an expansionary monetary policy, keeping liquidity in the domestic financial system at high levels in April. Credit institutions' lending to domestic sectors continued a mild recovery in the first quarter of 2017, with lending to the households sector growing at a stronger rate than lending to other sectors. Net external debt increased slightly in the first two months of 2017. The Excessive Deficit Procedure Report confirmed the strong fiscal consolidation implemented in 2016 and available data suggest that fiscal performance remained favourable in early 2017.
The Council also reviewed an analysis of the main risks to financial stability. Despite continued economic growth and favourable economic indicators, the domestic economy's structural vulnerabilities have mounted, stemming mostly from the materialisation of some of the risks related to the Agrokor Group. However, given the share of the Group's debt in Croatia's total external debt, its restructuring is expected to reduce the interest burden on Croatian companies and, in turn, the cash outflow from the country. The Group's successful restructuring and the orientation of its companies towards foreign markets could also increase profitability and exports in the medium term and boost foreign direct investments in production capacities.
The banking system is highly risk-resilient, for the most part due to high capital requirements and other measures timely introduced by the CNB in the previous period. The system has remained robust and, despite risks from its high exposure to the government sector and high concentration of exposures, capable of withstanding every substantial risk materialisation, including the considerable write-off of loans granted by banks to the Agrokor Group.
The Council also warned of the risks related to a change of the deposit structure involving an increase in very short term kuna deposits in transaction accounts due to a long period of low interest rates. This change in the currency structure has boosted lending in kuna, but it has also increased the banking system's exposure to liquidity risk and interest rate risk.