Croatia Central Bank Statement

Author: | Published: 24 Sep 2019
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Croatia has been enjoying economic growth in 2019, backed by robust employment figures, record consumer optimism and strong household borrowing. Both domestic demand and commodity exports have been contributing to growth. However, average consumer price inflation slowed down relative to 2018 due to the decline in energy prices and lower VAT on food. The considerable surplus in current and capital accounts also continued in 2019, primarily due to increased tourism revenues and stronger EU funds absorption, and contributed to appreciation pressures. In 2018, the budget recorded a primary balance surplus for the second consecutive year, while the external debt and public debt-to-GDP ratio continued to decline.

The Croatian National Bank (HNB), like a number of other central banks, persisted with an expansionary monetary policy. The HNB was providing high levels of liquidity to the banking system, while also maintaining a stable nominal exchange rate between the domestic currency and the euro. High liquidity and low interest rates were supporting a recovery in borrowing, both by households and corporates. In fact, the favourable financial conditions, coupled with soaring consumer optimism, were generating very strong consumer loan growth. Consequently, the HNB had to issue a recommendation to banks to apply more conservative lending standards to consumer loans.

The HNB has been pursuing the Eurostrategy, officially adopted in May 2018. One of the major steps in the process of euro adoption was to prepare and send (in July 2019) the Letter of Intent and Action Plan to enter the European Exchange Rate Mechanism (ERM II). Our goal is to join the ERM II simultaneously with establishing close cooperation with the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The latest financial crisis strengthened the EU's banking architecture. The SSM and SRM protect common banking rules to secure a level playing field for banking competition and protect and safeguard (retail) bank depositors and taxpayers in case a bank, whether small or large, exits the market.

Positive economic developments in Croatia in 2019 were being supported by spillovers from the euro area and the ECB's accommodative monetary policy: a rising tide lifts all boats. However, a potential slowdown in European growth would have implications for Croatia. The ECB announced further monetary easing in June 2019. Although the support to ailing European growth from monetary accommodation is much welcomed, monetary tightening – a testament to an economy being able to grow on its own – is still out of reach. For a small open economy on the outskirts of Europe, this sends a mixed message.

Among the challenges facing the Croatian economy are tight labour markets and emigration. Wage growth has started to pick up and labour force shortages may hamper future growth prospects. One of the most immediate remedies includes more decisive structural reforms to catch up with the EU. Automatisation and digitalisation could also lead to some labour-saving processes but it is a long haul solution.