CNB Council: Household and corporate credit continue to grow

Published: 7/12/2022

At its session today, the CNB Council discussed current economic and financial developments and adopted a monetary policy projection and the Semi-annual Information on the Financial Condition, the Degree of Price Stability Achieved and the Implementation of Monetary Policy in the First Half of 2022. The Council also adopted several decisions on matters falling within its competence.

Responding to a weaker global economic outlook and elevated inflationary pressures, central banks promptly and strongly tightened their monetary policies, a move that is having an increasingly adverse effect on the Croatian economy. Being sensitive to high energy costs and disruptions in global supply chains, the domestic manufacturing sector has been strongly exposed to negative external shocks. In contrast, the service sector has so far resisted global difficulties, being backed by strong demand created after the abolishment of most containment measures. Under such circumstances, Croatia’s real GDP fell in the third quarter from the previous quarter and its annual growth rate decelerated to 5.2%, with economic activity expected to continue to slow down towards the end of the year.

Consumer price inflation picked up sharply in the first ten months of 2022, reaching an annual rate of 13.2% in October. Domestic producer and consumer prices accelerated mainly due to the high global prices of energy products and food and industrial raw materials as well as due to pressures arising from continued partial delays in global supply chains. Inflation was also spurred by strong demand for services, including a considerable share of non-resident tourist demand, generated after the abolishment of containment measures. The uplift in demand for tourist services occurred in the conditions of increasing input costs, the lack of qualified labour force and the growth of wages in hotels and restaurants. The general price level grew at a somewhat muted pace because of restrictions on the prices of some energy products and basic food products. The growth of energy product prices led to a deterioration in the goods account balance in the third quarter, but the impact of this deterioration on the total current and capital account balance was for the most part offset by the exceptionally good results of tourism activity.

The reversal of the monetary policies of the world’s leading economies has gradually begun to reflect on the growth of domestic interest rates. Yields on government debt securities continued to grow and corporate financing costs started to increase, while the financial conditions of household lending have still not changed significantly. In the process of Croatia’s joining the euro area, the liquidity surplus of the domestic banking sector will be increased on account of the adjustment of monetary policy instruments, so that the worsening of financing conditions for the domestic economy because of the expected tightening of the ECB’s monetary policy will be alleviated. 

Total corporate financing continued to accelerate on an annual level, due in particular to stepped-up borrowing with domestic credit institutions. Household lending also continued to grow, with the bulk of the growth coming from housing loans. The kuna/euro exchange rate was stable in the first half of 2022 so that there was no need for CNB interventions. The summer months saw appreciation pressures, but they were alleviated by the corporate sector’s periodic foreign exchange demand, especially pronounced in the energy sector because of the price increase of raw materials and energy products. The participation in the ERM II and the soon to be implemented euro changeover additionally anchored market expectations regarding exchange rate trends.

As part of preparations for the euro changeover, the CNB Council, at the session held on 7 December 2002, adopted the Decision on monetary policy implementation and the Decision on the release of US dollar liquidity, to be applied as of 1 January 2023. These decisions transpose ECB guidelines regulating the implementation of Eurosystem monetary policy operations into the national legislation.

The CNB Council analysed the latest assessment and projections of key macroeconomic measures, which were for the first time made taking into account the assumptions and procedures of the ECB, in view of the fact that Croatia is soon to become a member of the euro area. In line with the established practice of the Eurosystem, the CNB Governor will present macroeconomic projections for Croatia to the Croatian public after the ECB publishes macroeconomic projections for the euro area.

The CNB Council also granted approval to the Supervisory Board of Partner banka d.d. to appoint Petar Repušić as Chairman and Luka Čulo as Member of the Bank’s Management Board.