CNB Council: Croatian National Bank announces a structural operation and starts purchasing Republic of Croatia bonds

Published: 13/3/2020

At its session today, the CNB Council examined the latest central bank measures aimed at maintaining the exchange rate stability and financial stability during the coronavirus epidemic crisis in Croatia. The Council also discussed recent monetary and economic developments and adopted several decisions on matters falling within its competence.

The GDP annual growth rate decelerated to 2.5% in the last three months of 2019, with real economic activity growing at a rate of 2.9% over the whole calendar year. In early 2020 employment continued to grow and unemployment to decline, albeit at a slower pace, whereas wage growth accelerated. The annual consumer price inflation rate rose from 1.4% in December 2019 to 2.0% in January 2020, driven by the price growth of unprocessed food products and pharmaceutical products (partly due to a base effect resulting from a VAT rate cut last year) as well as of refined petroleum products. Monetary policy remained supportive of favourable trends in funding conditions for domestic sectors. The annual bank placement growth accelerated to 4.3% in January on the back of an annual growth in corporate placements, while household loans held steady. According to monthly MoF data, the central government budget ran a surplus of 0.9% of GDP on an annual level in 2019.

Due to the deterioration of economic conditions caused by the spread of coronavirus, and taking into account that the major EU economies have been afflicted by the epidemic, the hardest hit being Italy, Croatia’s main trading partner, real GDP trends in Croatia are very likely to considerably deviate from projections in 2020. The weakening of foreign demand is expected to primarily influence tourism, a major contributor to GDP in Croatia, and goods exports. Should the epidemic in Croatia spread on a large scale, it would also have a short-term economic effect on other activities, probably influencing domestic demand developments.

At this point of time it is very difficult to reliably predict the effects of the coronavirus outbreak on the economy, as its spread pace and potential duration are unknown, and so are the types and intensity of measures to be implemented by the governments of inflicted countries to combat the epidemics. This uncertainty, coupled with increasing concerns about unfavourable performances in late February and the first decade of March, has resulted in an extremely high volatility in international financial markets and an increase in foreign exchange demand in Croatia. All of this has led to the depreciation of the EUR/HRK exchange rate. Under such conditions, the CNB, for the first time after almost four and a half years, intervened by selling foreign exchange on three occasions between 9 and 13 March in order to preserve the exchange rate stability, a precondition for the fulfilment of its legally prescribed goals: the maintenance of price stability and financial stability. The total amount of foreign exchange sold through these three interventions was EUR 1,214.35m.

In order to help overcome the epidemic-induced crisis, the CNB has announced a structural operation for a five-year term, at an interest rate of 0.25%, to be conducted on Monday, 16 March 2020. The CNB has also started purchasing Republic of Croatia bonds with an aim of maintaining stability in the market of government securities.

In accordance with the statement of the European Banking Authority (EBA) of 12 March, the CNB will next week publish its supervisory expectations, with a focus on the recommended flexibility in the implementation of the EBA Guidelines on management of non-performing and forborne exposures as well as relevant credit risk management strategies.

The CNB is closely monitoring the developments, standing ready to make timely responses by implementing measures within its competence that may contribute to overcoming the crisis, should this prove necessary.

Also at this session, the CNB Council approved the proposal of Banka Kovanica d.d. to appoint Nicola Ceccaroli as Chairman and Ivan Mužić as Member of the Bank's Management Board, and the proposal of Zagrebačka banka d.d. Zagreb to appoint Romeo Collina as Chairman of the Bank's Management Board.