At its session today, the Council of the Croatian National Bank examined recent monetary and economic developments, adopted the Semi-annual Information on the Financial Condition, the Degree of Price Stability Achieved and the Implementation of Monetary Policy in the second half of 2019 and a report on banking system’s condition in the fourth quarter of the previous year. The Council also discussed the analysis of the system’s financial stability in the first quarter of 2020 and made several decisions on matters within its competence.

Available monthly indicators show that real activity fell in the first quarter of 2020 from the previous quarter and decelerated on an annual basis. Such projections are primarily based on data for March that reflect the first negative economic consequences of the novel coronavirus pandemic. Due to the economic lockdown and a high degree of uncertainty surrounding future epidemiological trends, business and consumer confidence indices decreased sharply In April. The annual consumer price inflation rate dropped from 1.5% February to 0.6% in March, mainly due to refined petroleum product prices.

Depreciation pressures on the kuna to euro exchange rate, which had arisen in early March, ended in mid-April and the exchange rate started to appreciate slightly. The central bank has since the beginning of March implemented a number of monetary policy measures aimed at preserving the exchange rate stability and keeping monetary policy highly expansive. These include interventions in the foreign exchange market, a structural operation releasing long-term kuna funds to banks and reactivated regular weekly operations. The CNB has also reduced the reserve requirement rate from 12% to 9%, thus increasing banks’ free reserves with the central bank. In an effort to maintain stability in the government securities market, the CNB has made three purchases of securities of the Republic of Croatia. The liquidity of the domestic financial system, supported by the CNB's expansionary monetary policy, has remained high, enabling continued favourable conditions for the financing of domestic sectors.

Monetary institutions' net claims on the central government increased considerably in March, primarily due to the CNB's purchases of government securities in the secondary market. Bank placements to other domestic sectors accelerated on an annual basis, the number of corporate loans increased, while the annual growth of placements to households decelerated slightly. The rising demand for foreign currency liquidity has resulted in the strong growth of foreign currency deposits of domestic sectors. According to the fiscal report for April, the general government budget showed a surplus of 0.4% of GDP in 2019, an increase of 0.2 percentage points from 2018.

Due to the strong macroeconomic and financial shocks from the coronavirus pandemic and containment measures systemic risks increased in early 2020. Adverse macroeconomic developments have weighed on the operations of companies and increased their needs for short-term liquidity, while the fall in employment has reduced household income. In addition, public debt is expected to increase sharply and government financing needs to rise. All of these factors have heightened cyclical (short-term) risks in the non-financial sector and the structural vulnerabilities of the domestic economy.

The increases in corporate solvency risk and household credit risk will impair the quality of credit portfolios of credit institutions, reduce interest income and increase value adjustment expenses. As a result of these trends, banks’ profitability will decrease and short-term risks in the financial system will mount. The CNB has responded to these trends by implementing a range of monetary, supervisory and other measures aimed at alleviating the negative consequences of the pandemic on the financial system and the economy. In an environment of heightened uncertainty, the banking system’s stability is ensured by high liquidity and capital levels and the coverage of non-performing placements by value adjustments.

Also at this session, the CNB Council approved the proposal of Raiffeisenbank Austrija d.d. to appoint Liana Keserić as Chairwoman and Zoran Košćak as Member of the Bank’s Management Board as well as the proposal of Zagrebačka banke d.d., Zagreb to appoint Slaven Rukavina and Spas Vidarkinsky as Members of the Bank’s Management Board.