The Council of the Croatian National Bank met today for its first session in a changed composition, in accordance with the provisions of the Act on the Croatian National Bank which entered into force with Croatia's accession to the European Union. At this session, the CNB Council discussed recent economic and monetary indicators, examined further possible developments and determined monetary policy framework for the forthcoming period.

According to present expectations, the real GDP could fall by approximately 1.0% in 2013. Personal consumption and public spending are also expected to fall, while exports and investments will grow, albeit very slowly. Slower projected GDP growth than that originally planned under end-2012 projection is primarily due to a bigger than originally projected fall in personal consumption and partly to a slow investment cycle revival and absence of recovery in economic activities of Croatia's main trading partners abroad. A higher than planned fall in personal consumption is due to unfavourable developments in the labour market and the resulting significant fall in disposable income. Household deleveraging will also have an unfavourable effect on personal consumption. However, the fall in household sector indebtedness, or improvement in this sector's net financial position of approximately 25% since the beginning of the crisis, will pave the way for more robust growth in personal consumption once the situation in the labour market starts to improve, which depends very much on stronger investment activities.

Modest signs of economic activity recovery are expected to be seen from mid-2013, while gradual recovery of the real GDP (approximately 0,7%) is expected to be seen in 2014, fuelled by investments and exports growth. The CNB Council also noted the excessive deficit procedure that will probably be initiated against Croatia in the context of the Stability and Growth Pact and the relatively strong fiscal consolidation efforts that will be required in this context in the following years. They also noted that positive short-term effects of the accession to the European Union will be seen in 2104 as a result of simplified foreign trade procedures, the use of structural and cohesion funds and confidence strengthening due to fiscal consolidation that will put public debt path on sustainable levels over a long term.

The average annual rate of consumer price inflation in 2013 is expected to be much lower (around 2.6%) than in 2012, mainly due to the absence of the effects of earlier adopted administrative decisions on price changes, and to be even lower in the years ahead. The monetary policy in 2013, as in the following year, will aim towards stability of the exchange rate of the kuna against the euro. In this context, the CNB will continue to support high primary liquidity of the banking system in order to boost domestic financing conditions. The trend of recovery in credit aggregates, particularly corporate loans, has been evident since the beginning of the year, and is expected to continue gradually. However, domestic financing will again be negatively influenced by poor demand for loans and heightened risk aversion of banks.

Financial system stability remains high, positively influenced by a fall in the risk premium and a historically low benchmark interest rate in the international financial market. However, real sector weaknesses in Croatia and Croatia's major trading partners continue to push the risk up. In the conditions of household deleveraging and a small growth in the borrowing of non-financial private companies, the banking sector continues to steadily reduce its foreign liabilities. Despite a significant fall in banking system profitability, the capital adequacy of the banking system, accumulated in the pre-crisis period, ensures banking system resilience against possible but not very probable strong macroeconomic shocks.

At today's session, the CNB Council granted the application by the supervisory board of Nava banka d.d., Zagreb for the appointment of Mislav Sepčić as the chairperson and Hrvoje Ćosić as a management board member, the application by Primorska banka d.d., Rijeka for the appointment of Goranka Šmer as a management board member and the application by Samoborska banka d.d., Samobor to extend the term of office to Marijan Kantolić, as the chairperson and Verica Ljubičić as a management board member in that bank.

The Council also approved a change in Partner banka, d.d., Zagreb, whereby Božo Čulo acting in the capacity of a natural person takes over the possession of ordinary shares from Metroholding d.d., Zagreb, a company in his ownership. GIP Pionir d.o.o. was given an approval to increase its equity share in Nava banka d.d. to over 50% through recapitalisation, thus raising the equity share of Grupa Pionir in this bank from 74% to 86%.