May the 13th, 2022 - Croatian loan interest repayments are set to grow, and the Croatian National Bank (CNB) has worked to highlight some of the main risks.

As Poslovni Dnevnik/Tina Lakic writes, the Croatian National Bank has stated that statistical indicators show that current economic growth strengthened earlier this year. But at the same time there was a visible weakening of consumer confidence, which remained relatively low in April, despite a slight recovery. As such, employment growth stopped in March, although nominal wages are growing more rapidly.

They also referred to the ongoing price hikes when it comes to both food and energy prices.

"Rising prices for oil, food and raw materials on global markets, partly affected by the war in Ukraine, are spilling over into Croatian prices of petroleum products and food, so inflation accelerated significantly during March. Due to the expected change in the monetary policy direction of the central banks of the largest economic areas, the increase in short-term and long-term government financing costs continued, and interest rates on corporate loans also rose slightly. In such conditions, the growth of placements to non-financial corporations accelerated sharply, while placements to households continued to increase at stable rates, reflecting mainly strong housing loans.

Increased systemic risks

The overall exposure of the Croatian financial system to systemic risks has increased due to the war in Ukraine and sanctions placed against Russia, and when it comes to the Croatian economy in particular, these effects are largely seen in movements in raw material and other commodity prices on both global and regional markets. Pandemic-related uncertainties, as well as recent geopolitical tensions, have so far not threatened the stability of Croatia's financial sector. An important role was played by the overall good liquidity and capitalisation of the banking sector, which is also supported by the protective layers of capital built so far,'' they stated from the CNB's Council.

Challenges and risks for the Croatian financial system in the coming period are related to the development of geopolitical instabilities and inflationary pressures, as well as the effects of the expected normalisation of monetary policy and the continued rise in housing prices. The duration of the ongoing war in Ukraine and the intensity of its consequences will determine the strength of the impact on macroeconomic, fiscal and financial developments. Disruptions in supply chains, which further encourage price increases, can place a major burden on both businesses and households.

Tightening monetary policy and rising Croatian loan interest rates

"In the context of rising inflation, monetary policies are expected to tighten with the raising of key interest rates of central banks in the largest economic areas. This will gradually increase the cost of new borrowing as well as the debt repayment burden for existing debtors with variable interest rates. The possible adverse effects of Croatian loan interest rates and their increasing on the financial system are being mitigated by the tendency to reduce total household and corporate indebtedness with a relatively low level of household debt and a small number of loans with which repayments could increase significantly. In addition to that, the expected introduction of the euro in 2023 could further mitigate the growth of the price of new borrowing for the state, as well as for other sectors.

Tightening up financing conditions in international financial markets, and then raising Croatian loan interest rates, could mitigate some of the risks to financial stability that have intensified over a long period of low interest rates, such as strong private sector borrowing, low bank profitability and the search for risky alternatives which still do offer higher rates of return. Such is the risk associated with the strong rise in residential property prices, which is supported, among other things, by a large volume of housing loans,'' they said from the CNB.

The property market is under a magnifying glass

The CNB continuously monitors and analyses the development of systemic vulnerabilities in order to be able to act on them if necessary with measures within its competence.

Thus, at the beginning of 2022, it was announced that they'd raise the countercyclical buffer rate, which will further 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 the event of a sudden crisis. The CNB continues to closely monitor lending conditions at the level of individual debtors, so that potential sources of systemic risks can be diagnosed in a timely manner and measures can be taken to mitigate them, including prescribing stricter consumer lending conditions.

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February the 6th, 2022 - When it comes to the question on many lips of precisely when Croatian loan interest rates might pick up again, the European Central Bank announced recently that its key interest rates are to remain at their existing minimum levels, despite record inflation which is currently occuring right across the Eurozone.

As Poslovni Dnevnik writes, that said, inflation, which was considered temporary by everyone last year, is obviously "spilling over" into this year as well, so much so that it exceeded five percent in the Eurozone back in January.

However, this decision of the ECB to not start with a significant tightening of their monetary policy was expected, given that the President of the ECB Christine Lagarde has stressed before that it should not be rushed, and that there will be no increasing of any key rates before the year 2023.

Some analysts are already questioning the ECB's assessment because it is obvious that inflation is unfolding much more rapidly than their previous forecasts claimed it would, and they think that the ECB itself also underestimates this very real risk.

With all of that having been said, even if there has been a change in perspective, one can hardly expect a sudden change in the narrative because even that recognition alone could be counterproductive. Recently it was indicated that key interest rates, and that includes those attached to Croatian loans, should not increase (it all depends on further inflation), but of course the door was left open for this to happen next year. However, the ECB remains on the path of reducing bond redemption above all else.

The ECB also said in a statement that the Governing Council would suspend the net purchase of assets under the Pandemic Emergency Purchase Programme (PEPP) at the end of March this year. As for the asset purchase programme (APP), it will be gradually reduced, and it is expected that “net purchases will be completed just before the key ECB interest rates start to rise”.

The ECB is therefore again at the back of central banks when it comes to changes in monetary policy. The US Federal Reserve announced a recent increase in key interest rates, on several occasions this year, and the Bank of England (BoE) also raised its key rate just a few days ago.

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December the 13th, 2021 - Croatian cash loans are attractive to many, and there has been a very strong jump in comparison to this time last year.

As Poslovni Dnevnik writes, the aforementioned strong jump in Croatian cash loans speaks in favour of the growing demand of people for non-purpose cash loans, which was recently discussed by the Croatian National Bank, and in the context of expectations of the increased contribution of personal consumption to GDP growth in the last quarter of 2021.

It may also point to a rise in consumer optimism in November this year compared to the same month last year. Banks have decided to meet the increased demand, so there is almost no bank that isn't highlighting this offer of a cash loan in its promotional campaigns and on its website.

In part, this is an expected increase in consumption for the pre-festive period, but as times are unusual, trends which would otherwise be typical for this time of year are being closely monitored.

These days, Croatian banks are really bombarding the public with advertisements for "affordable and quick cash", with interest rates that have never been lower for this type of product, but are still at levels that make this product profitable for banks, even in the face of rising inflation, Novi list writes.

In addition to the fact that some people are now spending more of the cash they saved during lockdown, some people are also taking out non-purpose Croatian cash loans to buy anything and everything, including various consumer goods, and they're probably also patching up their household budgets in conditions of rising prices.

Some banks have confirmed that people, when it comes to cash loans, continue to demand kuna and not the single currency, despite the fact that the euro is likely to be introduced in early 2023. Admittedly, the maturity of "cash" loans of course implies a shorter period than housing loans do, but they are approved for a period longer than one year.

It turns out that Croatian cash loans, which continue to grow at a slower rate than housing loans do (due to government incentives and real estate investments), are clearly accelerating as we head towards the end of the year, and banks are still expecting their "boom" in December.

Privredna banka Zagreb (PBZ) also confirmed that in the past period there has been a continuous interest in Croatian cash loans, and that "kuna loans still predominate". OTP banka says that they are continuously recording positive trends in regard to Croatian cash loans, and in the last quarter there has been a slight increase in demand, which, they say, is expected for this time of year, and given the ongoing global coronavirus pandemic and its astounding impact on personal consumption.

In the currency structure, kuna loans are still the most represented, according to OTP, and RBA has been recording an increase in non-purpose loans to people throughout 2021.

They say that the demand for kuna loans is usually higher compared to loans with a currency clause in euros, but in the last quarter there was an increase in non-purpose loans with a clause in euros, probably due to the country edging ever closer to Eurozone entry.

Addiko Bank says that "the end of the year is focused on consumption, gifts and family for consumers, and less on solving financing and investment planning, so that the demand for loans is seasonally the weakest compared to the rest of the year."

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