At its session today, the Croatian National Bank Council discussed current economic and financial developments, reviewed macroeconomic and financial risks and adopted several decisions on matters falling within its competence.
Economic activity continued to grow in the last quarter of 2021, although at a slower pace than in the preceding part of the year. Industrial production increased while real retail trade turnover and construction activity remained at the level seen in the third quarter. As the growth in employment and the decline in unemployment figures continued in the fourth quarter of 2021, their values were more favourable towards the year-end than before the outbreak of the pandemic. The nominal increase in wages continued to pick up speed, while inflation added to the ongoing fall in the average real wage in the last quarter. The annual rate of consumer price inflation accelerated to 5.5% in December 2021 (from 4.8% in November), mostly driven by higher prices of food, which, along with energy prices, had an increasingly strong impact on overall inflation. The ongoing expansionary monetary policy continued to exert a downward pressure on banks’ interest rates. While money market interest rates remained at zero, yields on government bonds edged up driven by changes in financial market expectations. The annual growth of bank placements was 3.9% at the end of 2021, the same as at end-2020. The growth in household placements more than doubled, from 2.1% in December 2020 to 4.5% in December 2021, mostly due to the sharp increase in housing loans and, to a lesser extent, the recovery of general-purpose cash loans. In contrast, the growth in placements to non-financial corporations slowed down in the same period, from 5.6% to 2.2%.
Financial stability risks remained elevated when compared with pre-crisis levels owing to the uncertainty regarding the end of the pandemic, growing consumer price inflation and the upsurge in residential property prices, coupled with mounting geopolitical risks. While the sharp economic rebound enabled the gradual lifting of measures to support the economy, new waves of the pandemic continued to cause problems in global supply chains, fuelling an increase in prices. This has increased the risk of long-term inflationary pressures and higher than currently expected inflation, which might prompt a faster and sharper monetary policy tightening by the central banks in major monetary areas. Heightened volatility in financial markets in early 2022 largely reflects the uncertainty regarding inflation trends, shifts in monetary policies and expected interest rate hikes.
The robust growth in housing loans in Croatia continued in 2021, coupled with the rise in residential property prices, which picked up to 9.0% in the third quarter of the year. These prices have increasingly deviated from both long-term trends and macroeconomic fundamentals, which increases the risk of their fall in the event of economic disturbances. The rise in household indebtedness and lenient credit standards will this year again be supported by the government’s housing loan subsidy programme, which alleviates the financial burden of debtors during the initial repayment period. Nevertheless, in case of adverse shocks, repayment costs and vulnerability of debtors will increase once subsidies expire.
In response to the continued accumulation of cyclical systemic risks, in particular the rise in residential property prices and more dynamic lending in the segment of housing loans, the CNB announced that the countercyclical buffer rate in the Republic of Croatia will be raised from 0% to 0.5% as of 31 March 2023. The purpose of the measure is to ensure timely allocation of additional capital in an effort to strengthen the resilience of credit institutions to possible losses associated with exposure to cyclical systemic risks in the downward phase of the financial cycle or in case of a sudden crisis.