ZAGREB, 13 July 2022 - Real GDP growth could be 5.5% this year and 2.5% in 2023, while inflation could slow down from this year's 9.4% to 4.6% in 2023, the Croatian National Bank (HNB) said on Wednesday.

According to the HNB's summary of macroeconomic trends and estimates, the economic repercussions of the Russian invasion of Ukraine, the continued rise in energy and raw material prices, and the disruption of global supply chains have not seriously affected Croatia's economic growth outlook.

However, unfavourable global circumstances and pronounced inflationary pressures could have a bigger impact on domestic economic trends in 2023, when real domestic activity growth is expected to slow down to 2.5%.

The risks remain pronounced in the projected period 2022-23, with the prevalence of risks that could have a negative impact on economic growth, such as a gas embargo, food and energy price hikes, tighter financing conditions than expected, and a deterioration of the COVID situation.

HNB governor Boris Vujčić told the press that growth in Q2 this year was expected to be stronger than in Q1, when it was 7%, the tourism season was expected to make a very strong contribution in Q3, and "solid growth" was expected in Q4.

He said Q4 was much more uncertain and that for the most part, it depended on developments on the energy market, and whether there would be a gas embargo for Europe, which would significantly change the economic outlook for Q4 and 2023.

Vujčić said a recession was possible next year, mainly due to a stoppage in gas deliveries to Europe. The recession could first occur in Croatia's main trade partners, Germany and Italy, and then spill over to Croatia, he added.

As for this year's tourism season, he said arrivals were almost the same as in 2019, while accommodation and hospitality prices increased by 20 to 30%, which would point to a record tourism season financially.

Inflation in June surpasses 11%

This year's inflation of consumer prices could accelerate to 9.4%, first and foremost as a result of considerably higher global energy and raw material prices, the HNB says. On the domestic market, energy and food prices continue to increase the most, but the increase in prices of other goods and services is gradually accelerating, too.

Vujčić said inflation was expected to increase to over 11% in June, that during the summer it should be at 11% or 12%, while it was expected to start slowing down at the end of this year and especially at the start of 2023.

The growth of the main inflation sub-components is expected to slow down in 2023 and total inflation as well, to 4.6%. However, this forecast hinges on the stabilisation and, later this year, the gradual decrease in energy and raw material prices on the global market, according to the HNB.

Inflation projections for this year and the next are dominated by risks that could increase it further, including higher energy and raw material prices and a more pronounced salary growth.

Vujčić said the fight against inflation envisaged higher interest rates and that the European Central Bank announced that this could begin this month already. "I expect this to continue in the autumn."

The goal is for HNB and ECB interest rates to be the same as of 1 January 2023 and Croatia's accession to the euro area, he said.

Mandatory reserves to be reduced to 1%, no more foreign currency claim obligation

The HNB Council decided today to reduce banks' rate for calculating mandatory reserves from 9% to 5% this August and from 5% to 1% in December, which is the mandatory reserve rate in the euro area, Vujčić said.

He also decided that the minimum amount of foreign currency claims be reduced from 17% to 8.5% in August and abolished in December.

The effect of the first measure will be the release of HRK 34.2 billion in mandatory reserves, while the second will allow banks to release or differently dispose of €5 billion, Vujčić said.

Historically low interest rates

He said today's decisions would also affect interest rates by making financing cheaper for banks, so they would have fewer reasons to raise them, notably on new loans. They can reduce them further, depending on their business policy, he added. "But we'll see where we are at the start of next year."

Vujčić said interest rates in Croatia were historically low, while those in EU countries outside the euro area were considerably higher, twice as high for housing loans.

Decrease in real and increase in nominal pay

This year, employment is expected to continue to grow and unemployment to fall, with an increase in nominal and a decrease in real pay.

Vujčić said the current situation on the labour market was unusual, given that the private sector was recording a strong rise in nominal pay, about 10%, mainly due to the difficulty to find qualified labour, while wage increases in the public sector were slower.

Looking at the two sectors together, the growth in wages is somewhat lower than that of inflation, and this year real pay is expected to drop 1.5-2%, Vujčić said, adding that wage increases were expected to be at the level of inflation growth only in the private sector.

Euro area and Schengen additional incentive to foreigners to buy real estate

Speaking of the real estate market, Vujčić said property prices in Q1 were 13.5% higher year on the year and that the increase was also due to very low interest rates on savings, which are even negative in neighbouring countries, prompting foreigners to buy due to the higher yield.

The increase in property prices is also due to the government's subsidised housing scheme as well as the acceleration of inflation.

Vujčić said Croatia's accession to the euro and Schengen areas would be an additional incentive to buy real estate. On the other hand, if the rise in ECB interest rates also affects those on deposits, this rise should also reduce the incentive to buy real estate, but this can't happen overnight, he added.

Market activity could slow down due to the expected tightening of financing conditions and unfavouable income trends.

For more, check out our politics section.

ZAGREB, 2 June 2022 - Euro area entry will boost Croatia's resilience to crises and external shocks and bring multiple benefits for its citizens and economy, Croatian National Bank (HNB) Governor Boris Vujčić said in a joint statement after meeting with European Commission Vice President Valdis Dobrovskis on Thursday.

The meeting was prompted by a convergence report issued by the EC and European Central Bank (ECB) on Wednesday, assessing that Croatia is ready to introduce the euro.

Vujčić told reporters that the EC's positive assessment of Croatia's compliance with nominal convergence criteria makes Croatia just a step away from euro area entry.

"We embarked on that road in 2017 and now we are completing the journey," he said, adding that this would mean a lot for Croatia and that the benefits of euro introduction would be much greater than the costs, both for citizens and for businesses.

Euro area entry will make Croatia much more resilient to the recent numerous shocks and crises, he said.

"It is definitely better to be in the euro area in the current time than outside of it," he said.

After Croatia joins the euro area, the HNB, too, will become fully integrated in the euro system and become part of it, he said, recalling that in October 2020 the HNB established close cooperation with the ECB, and that it was waiting for the final step of integration with the euro system.

Vujčić said that entry into the area of the world's second most important currency would mean progress for Croatia.

As for the technical aspects of conversion to the euro, specifically the operation of ATMs in the transitional period, the central bank's governor said that by 31 December most ATMs would be filled with euros and that by 15 January all would be filled with euros. Some of the ATMs will be filled with kuna in the transitional period but everything will be done to make the transition easier for citizens, he noted.

Asked if now was the best time to introduce the euro considering the global crisis, Vujčić said it would have been better if Croatia had already entered the euro area.

"Joining the euro area as soon as possible is the best, this is the best moment we can have. That is evidenced, in my opinion, by the ECB's support already at the start of the crisis caused by the coronavirus pandemic, which would not have been possible had we not been very close to entry to the exchange rate mechanism. That helped us overcome the pandemic crisis more easily," he said, adding that unlike most EU countries that are not euro area members and where interest rates have grown significantly since the start of the Ukraine war, in Croatia interest rates are the same as before.

EC Vice-President Dombrovskis congratulated Croatia on what he described as a historic achievement, noting that the country had met all the relevant criteria and that it was expected to join the euro area on 1 January 2023.

He said that the EC would continue cooperating with Croatia and the HNB.

Euro area entry is important because the whole world has been affected by the crisis caused mostly by the war, which is why it is important to join the part of Europe that uses the world's second strongest currency. That will help Croatia in many financial aspects, among other things, with lower interest rates, the EC official said.  

For more, check out our politics section.

ZAGREB, 19 May 2022 - Croatian National Bank (HNB) Governor Boris Vujčić said on Thursday that the introduction of the euro in the country as sole legal tender would strengthen the resilience to crisis, bring about better terms and conditions for borrowing, boost competitiveness and improve cost-efficiency.

The highest share of exchange risk and foreign currency lending risk will be eliminated, and banks will have direct access to the euro-area and the eurosystem's monetary operations, all of which will make their performance easier, Vujčić said at the 25th expert conference on the financial market, organised in Opatija by the Croatian Banking Association (HUB).

He recalled that all the preconditions for the changeover to the euro on 1 January 2023 had been met and that the Council of the EU was expected to make a formal decision on Croatia's admission to the euro area.

Croatia expects the Council to give a nod in July.

The country will start minting euro coins in the second half of 2022.

Vujčić said that all the segments of society would be ready for the euro changeover, and that preparations were proceeding as planned.

The governor is confident that Croatia will meet all the convergence criteria, including price stability, sound public finances, sustainable exchange-rate stability, fiscal criteria and the criterion concerning long-term interest rates.

As for a one-off price rise during the changeover, consumer prices are likely to go up by 0.2 percentage points in the first year of the euro adoption.

For more, check out our politics section.

ZAGREB, 11 May 2022 - The Croatian National Bank (HNB) Council on Wednesday said the domestic financial system's exposure to systemic risks has increased due to the war in Ukraine and sanctions against Russia, and that inflation will increase the cost of new loans and burden loan repayments with variable interest.

The HNB Council discussed current economic and financial trends, underscoring that statistical indicators show that economic growth strengthened at the start of the year but that weaker consumer confidence is evident which, despite a mild recovery, retained a relatively low level in April.

Increased employment stopped in March, even though nominal wages are growing increasingly fast, while inflation has accelerated as the increased prices of oil and raw food on global markets, partially affected by the war in Ukraine, are spilling over onto domestic prices of petroleum products and food, HNB said.

Due to expected changes in the monetary policies of central banks in major economic areas, short-term and long-term costs of state financing have increased, with interest rates on corporate loans increasing slightly too, the HNB Council said. In those circumstances, lending to non-financial companies has accelerated, while household loans continue to increase at stable rates, reflecting strong housing loans.

The financial system's overall exposure to systemic risks has increased due to the war in Ukraine and sanctions against Russia, with the consequences prices of raw materials and other goods on global and regional markets. The uncertainties with regard to the pandemic and recent geopolitical tensions have not yet jeopardised the stability of Croatia's finance sector, HNB said.

The challenges in the coming period are related to geopolitical instabilities and inflationary pressures, the effects of expected normalisation of the monetary policy and the continued increase in real estate prices, HNB said.

Gradual price increase on new loans and burden on repayment of loans with a variable interest rate

The duration of the war in Ukraine will determine the degree of impact on macroeconomic, fiscal and financial trends.

HNB notes that disruptions in supply chains which additionally impact price rises could be a great burden on companies and households. In circumstances of growing inflation, it is expected that monetary policies will sharpen and key interest rates will increase in the largest economic areas. That will gradually increase the cost of new loans and burden loan repayments with a variable interest rate, HNB noted.

The negative impact of increased interest rates is buffered by a tendency of a decreased debt by households and companies and a relatively low level of debt by households and a relatively small number of loans whose repayments could increase significantly. The introduction of the euro as the official tender will additionally impact price increases and the government's debt.

Harsher financing conditions on international financial markets and then an increase in domestic interest rates could buffer some risks for financial stability that strengthened over the long period of low interest rates, such as the strong borrowing by the private sector, low bank profitability and search for risky investment alternatives that offer a higher return rate. That risk is also related to a strong price increases in real estate, which is supported by a large volume of housing loans, HNB said.

HNB underscored that it is monitoring and analysing the development of the financial system's vulnerability so that it can introduce measures in its remit. It recalled that at the start of 2022 it had announced raising the rate of anti-cyclic protected capital which would additionally strengthen the resilience of credit institutions from possible losses related to exposure to cyclic systemic risks in a downward phase of a financial cycle or the emergence of an unexpected crisis.

For more, make sure to check out our dedicated business section.

ZAGREB, 6 May (2022) - Addressing a traditional conference of regional central bank governors in the northern Adriatic town of Rovinj on Friday, Croatian National Bank (HNB) Governor Boris Vujčić said that all central banks have revised down their growth projections for this year and that inflation has not yet reached its peak.

Last month, the HNB revised its growth projections for this year, forecasting real GDP growth of 3.2%, down from its previous projection of 4.1%, on the assumption that the war in Ukraine does not last long and energy prices gradually return to normal.

The HNB estimates that inflation would average 5.4% in 2022, after reaching 2.6% in 2021.

The government recently also revised its growth forecast for 2022 from 4.4% to 3.0% and an inflation rate of 7.8%.

"At the moment consumption is still good. We haven't seen it slow down. Inflation will continue to increase and this isn't the peak yet. We are still waiting for April figures. What will happen later depends on the development of the war. However, the war has not had much of an impact on us as yet. Nevertheless, the longer it lasts the deeper the cumulative effects will be," Vujčić said in his address to the conference of regional central bank governors, organised by the Lider business weekly.

He added that when inflation increases above 5.0% it starts to affect expectations and spreads among more and more groups of products. In Croatia we have witnessed an increased number of products whose price has increased by more than 5.0%, he said.

"We cannot make any real forecasts and everything depends on energy prices. However, the inflation has nothing to do with the adoption of the euro as legal tender, as other factors are affecting price trends more," he said.

The regional bank governors talked about the repercussions of the conflict between Russia and Ukraine and the resolution of Sberbank, with Vujčić saying that even though Croatia is the youngest EU member state it managed to convince Brussels of a resolution plan outlining what should be done with subsidiary banks if the "mother bank goes into liquidation."

"Sberbank turned out to be a good precedent for future cases in Europe and there will certainly be more," Vujčić noted.

North Macedonia's central bank governor Anita Angelovska Bezhoska said that Europe expects slower growth this year and next.

Bosnia and Herzegovina's Senad Softić said that his country needs to revise some parameters due to the war and inflation but that the banking sector in Bosnia and Herzegovina is stable.

Slovenia's central bank governor Boštjan Vasle said that the Slovenian economy grew faster than the European average due to its milder epidemiological restrictions during the pandemic. He said that the two main growth drivers were exports and increased consumption. "Our current forecast is not that optimistic, but consumption is still strong," he added.

Adrović: Intensive preparations to introduce euro currency

The President of the Croatian Banking Association, Zdenko Adrović, said that Croatia is intensively preparing for the introduction of the euro.

"The threatening inflation and potentially increased interest rates raise new issues for monetary policies and banks. But that is not all because all this is happening when Croatia is intensively preparing to introduce the euro as legal tender. Banks have a huge role in the entire process and that is why it is the main issue this year," Adrović said, adding that the time frame was too short.

"Croatia will become a state with the shortest deadline to introduce the euro since joining the ERM II mechanism."

The good news is that prices in the country are already tightly connected with European prices, hence entry to the euro area is a logical economic and political choice for the country that is largely eurorised anyway, Adrović said.

For more, check out our politics section.

ZAGREB, 4 May 2022 - The best design for the national side of the 1 euro coin, chosen in a repeated competition, was presented at a meeting of the national council for the adoption of the euro as legal tender in Croatia on Wednesday.

The author of the design, student Jagor Šunde, received a HRK 70,000 reward for his work, while co-authors David Čemeljić and Fran Zekan each received HRK 30,000.

The Croatian National Bank (HNB) received 192 design proposals, of which 135 were considered in the first round of the competition, said HNB Vice-Governor Ivana Jakir-Bajo, who also serves as the chair of the Currency Commission and the Commission for the Selection of Design Proposals.

A jury of renowned Croatian artists and experts considered all the proposals received and chose the best five proposals without ranking them. In the second round of the competition, the HNB Currency Commission selected the best design and submitted it to the Council of the European Union, the European Commission and the euro area member states.

On 20 April, the HNB was notified by the Council of the EU that the design submitted had been approved.

The minting of 1 euro coins and coins of other denominations with the Croatian national side can begin only after the Council of the EU approves Croatia's decision to adopt the euro as legal tender.

The best designs for the Croatian side of euro and cent coins were originally presented in early February. However, it soon turned out that the selected author of the 1 euro coin design with the motif of a marten had illegally used a photograph of a marten by a Scottish photographer as a template for his design. The author, Stjepan Pranjković, withdrew his proposal after which the HNB invited new proposals for the 1 euro coin design.

The Croatian side of the 1 euro coin will feature a marten motif, 50, 20 and 10 cent coins will feature an image of scientist Nikola Tesla, and 5, 2 and 1 cent coins will have the letters HR written in the Glagolitic alphabet. All coins will also have elements of a chequerboard in the background.

For more, make sure to check out our dedicated lifestyle section.

ZAGREB, 29 April (2022) - Total lending by monetary institutions to domestic sectors, except the central government, increased by HRK 4 billion in March, with the annual growth rate accelerating from 4% to 5%, the Croatian National Bank (HNB) said on Friday.

This was the result of the increase in loans. Corporate loans increased by HRK 3.7 billion or 6.7% and household loans by HRK 900 million, while loans to other domestic sectors decreased by HRK 400 million.

In the structure of household loans, housing loans and general-purpose cash loans continued to increase, both by HRK 300 million.

The annual growth rates of both housing and general-purpose loans remained at previous month’s level, at 8.0% and 3.4% respectively, so household loans accelerated only slightly, from 4.4% in February to 4.5% in March. On the other hand, corporate loans accelerated considerably, from 2.4% in February to 6.7% in March.

For more, check out our business section.

ZAGREB, 26 April 2022 - The Croatian National Bank (HNB) will soon embark on a campaign for the euro replacing the kuna as the national currency which will be very extensive, as befits such an important event as Croatia's accession to the euro area on 1 January 2023, Večernji List daily said on Tuesday.

To raise public awareness of the introduction of the euro, the HNB has prepared a tender for the creation and implementation of a national information campaign, estimated at HRK 27 million, for carrying out the national plan of replacing the kuna with the euro.

As part of the campaign, HRK 6.8 million is envisaged for designing the promotional campaign, HRK 14.5 million for a media advertising strategy, HRK 1.55 million for PR and organising public events, HRK 800,000 for a call centre, HRK 400,000 for a public opinion poll, and HRK 2.95 million for the Euro on Wheels travelling exhibition.

The campaign is aimed at acquainting citizens with all the advantages of introducing the euro, informing them about the date of the introduction, the fixed exchange rate and trends in consumer prices, and at sending the message that the euro will not result in price rises that would undermine living standards.

Citizens will also be informed about how the government will protect them from unjustified price rises. A public opinion poll has shown that a considerable percentage are concerned that the euro might result in major price prices.

Another aim of the campaign is to increase public support for the euro, reducing citizens' insecurity and the feeling that they will be cheated in the process of switching to the euro.

It will be stressed that introducing the euro as the national currency leads to faster, more favourable and safer doing business, bigger investment, economic growth and higher living standards.

For more, make sure to check out our dedicated politics section.

ZAGREB, 13 April 2022 - The Croatian National Bank (HNB) expects in its baseline scenario that its projection of real GDP growth of 4.1% in 2022, published in December 2021, will go down to 3.2%, mostly due to unfavourable indirect and direct economic effects of the Russian invasion of Ukraine.

The HNB Council said in a statement after a session on Wednesday that the available highly frequent data indicate an acceleration of real activity growth in Q1, even though the annual growth rate could go down compared to the previous quarter.

"In the remaining part of the year economic growth is expected to slow down, primarily due to unfavourable indirect and direct economic effects of the Russian invasion of Ukraine," the HNB says, recalling that prices of energy products and other raw materials on the global market have increased and become more volatile.

In its baseline scenario, which envisages a relatively short duration of the Ukraine war and gradual normalisation of prices of energy products and raw materials on the global market, the HNB has reduced the expected real GDP growth in 2022 from the 4.1% projected last December to 3.2%.

With regard to inflation, the HNB says that it picked up in early 2022 due to growing prices of energy products and other raw materials as well as supply chain disruptions, resulting in higher prices of certain semi-finished products (such as semiconductors) and high freight rates.

For the entire year 2022 the HNB expects inflation to be at an average 5.4% (after 2.6% in 2021).

The strong recovery of economic activity last year resulted in a significant drop in the share of public debt in GDP, to 79.6% at the end of 2021, and in the first two months of 2022 a mild decrease in the deficit was reported compared to the same period of last year.

In the baseline scenario, the HNB expects the nominal budget balance to continue improving and the general government deficit to continue decreasing in 2022.

Due to energy price hikes the HNB expects 2022 to see a smaller surplus in the current and capital accounts than last year, but expects it to stay at a relatively high level of 5% of GDP.

The HNB Council today made a decision wrapping up the process of resolution of Sberbank d.d.

The Council also discussed current economic and financial trends and adopted a monetary policy projection for the period from 2022 to 2025. Also discussed was a report on the state of the banking system in 2021 and the Council adopted a decision on the HNB's financial reports for 2021.

For more, check out our business section.

ZAGREB, 3 April (Hina) - No risks to the stability of the financial system have been observed so far, given the high capitalisation of the banking system and relatively low household indebtedness, the Croatian National Bank (HNB) and the Croatian Banking Association (HUB) say.

The HNB has raised the countercyclical capital buffer (CCyB) rate from 0 to 0.5% due to the continued accumulation of cyclical systemic risks amid economic recovery following the crisis caused by the pandemic, the growth in the prices of residential real estate and the pickup in lending activity. The new rate is to be applied as of 31 March 2023.

This is the first time the central bank has increased the CCyB rate.

The aim of this instrument is to counter procyclicality in bank lending and mitigate risks to the stability of the financial system. Since its introduction in 2015, the CCyB rate for all credit institutions in Croatia stood at 0%.

The central bank said that the Croatian economy was currently in an upward phase of the financial cycle, when exposure to cyclical systemic risks grows. Such risks usually become apparent only after the cycle reversal.

The HNB made the decision in response to the continued accumulation of cyclical systemic risks, in particular the rise in residential property prices. 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.

The HNB warned that residential real estate prices had risen annually by 9% in the third quarter of 2021, growing faster than both income and rental costs. It expects the strong demand for housing loans, backed by a new round of housing subsidies, to continue this year.

It noted that the Croatian banking sector has ample capital headroom above the current regulatory capital requirements as the total capital ratio of the banking system stood at 25.6% at the end of 2021, being among the highest in the European Union.

The Croatian Banking Association (HUB) said that the banks would comply with the regulator's decisions and that as a result of the higher CCyB rate they would have an additional amount of capital which the regulator could release if necessary.

The HUB said it had not noticed any risks to the stability of the financial system given that the Croatian banking system is among the best capitalised systems in the world and total household indebtedness is still relatively low.

For more, check out our business section.