The CNB Council was at its meeting today briefed on current economic, monetary and financial developments in the euro area and Croatia. The Council was also informed about the decisions of the ECB’s Governing Council taken at the meeting of 2 February 2023 and the transmission of the common monetary policy through the banking system and financial markets of the euro area and Croatia.

Additionally, the Council was presented with a new issue of Macroprudential Diagnostics that analyses macroeconomic and financial developments at the end of 2022 and identifies vulnerabilities and risks to financial stability. Total risk exposure fell slightly at the turn of 2022 to 2023, the main reason being the disappearance of currency risk due to Croatia joining the euro area. Amid geopolitical uncertainties, high inflation, global economic slowdown and rising financing costs remain the key risks to Croatia’s financial stability. The banking system has continued to be stable despite a slight decrease in the total capital ratio. Bank profitability is relatively high, with some of the larger banks potentially liable to one-off windfall tax because of a sharp increase in their profitability in the previous year.

The ECB’s monetary policy tightening has led to a marked increase in the price of borrowing for the government and non-financial corporations, but not for the household sector, as interest rates on household loans can be expected to grow visibly no sooner than this year. Interest rate fixing, at least in an initial loan repayment period, which has become a widespread practice, will alleviate the effect that the growing loan repayment burden has on borrowers. Another short-term protective measure for households is a legal cap on loan interest rates. Residential immovable property prices accelerated further in 2022, which, coupled with strong corporate and housing lending growth, increases cyclical systemic risks. In December 2022, the CNB responded to that by raising the announced countercyclical buffer rate from 0.5% to 1%.