The Council of the Croatian National Bank, chaired by Governor Dr. Marko Škreb, met on Wednesday, December 9, 1998 to review recent economic and financial developments and starting points for forecasts of the 1999 monetary policy. The Council also adopted the report on international reserves management in the first three quarters of 1998. Further, the Council of the CNB was informed that by the end of November the central bank did not receive evidence on the recapitalization of Ilirija Banka d.d. Zagreb which would enable the rehabilitation of the bank according to its rehabilitation program, as well as stable operation of the bank in future. Due to the aforementioned, the Council of the CNB could not accept the submitted program, and did not find any justification for proposing to the Croatian Government the rehabilitation of Ilirija Banka d.d. with tax payers' money.

It was noted at the Wednesday meeting of the Council that economic indicators which will influence the formulation of monetary policy for 1999 are the satisfactory stability of prices (retail prices grew by 0.2 percent in November and by 5.9 percent compared to November 1997) and the exchange rate (the exchange rate has stabilized within the range of 3.73 and 3.74 kunas for the German mark with less frequent interventions of the central bank on the foreign exchange market), the decrease in trade and current account deficit (in the past ten months exports grew by 9.5 percent in dollar terms and by 14.3 percent in kuna terms, while imports decreased by 1.9 percent in dollar terms and grew by 1.8 percent in kuna terms compared to the same period last year). Another indicator to influence the determination of 1999 monetary policy is the wage increase (in the past ten months of this year net wages were in nominal terms by 12.8 percent and in real terms by 5.7 percent higher than in the same period last year). Less favorable indicators are the slow-down of economic activity, a high unemployment rate, the growth of arrears between enterprises and the repeated increase in interest rates and the spread. Keeping in mind these indicators, in 1999 the CNB will continue preserving the stability of prices and the exchange rate and looking after the satisfactory level of domestic liquidity and international solvency, acting in the framework narrowed by fiscal policy due to a more difficult access to international capital markets.

The Council of the CNB was required to give its opinion on requests submitted by a number of savings and loan associations that, for the purpose of complying with new regulation, applied to the Ministry of Finance for operating license. Having reviewed the submitted documents, the Council noticed that the regulation might be gotten around and the original goal and purpose of savings and loan associations not respected. There are, namely, certain indications that some savings and loan associations do not represent institutions whose members provide financial assistance to one another on the basis of their own saving deposits, but are being founded to be used as means to perform profitable financial operation under conditions that are more favorable than those laid down for the operation of banks and savings banks. Intentions of this kind have to be prevented in a timely manner, so that they cannot disturb the development of healthy and fair competition on the Croatian financial market.

Pursuant to the new decision of the CNB Council on mandatory reserve requirement in kunas, deposits received from banks, savings banks and HBOR are, besides loans, to be excluded from the base for the calculation of mandatory reserve requirement. Further, the rate used for the calculation of mandatory reserves for deposits of companies and financial institutions (for example of building societies) founded by commercial banks, will not be the 100 percent rate, but the regular rate of 29.5 percent. It has been estimated that due to these measures the total amount of mandatory reserves will be reduced by 24.6 million kuna.

At the Wednesday meeting, members of the Council decided that the interest rate of 5.9 percent is to be calculated on total banks and savings banks' mandatory reserves, that is, not only on the amount deposited obligatory with the central bank, but also on the amount kept in giro-accounts. Taking into consideration movements of interest rates on the money market and in commercial banks and the role of the central bank as "the lender of last resort", the Council of the CNB decided to increase the Lombard rate from 11 percent to 12 percent. However, if the granted Lombard loan is paid back by the end of the day on which it was granted, the interest charged will be only 7 percent. By introducing this measure, the CNB wants to enhance more careful liquidity management in banks and the use of secondary sources of liquidity primarily for real short-term and temporary disturbances in liquidity. In addition, the Council decided to grant to financial institutions another possibility for short-term borrowing from the central bank: Lombard loans will be granted not only up to 50 percent of the nominal value of NBC bills denominated in kuna and in foreign currency, but also up to 50 percent of the nominal value of Treasury bills (so far they were granted only up to 25 percent of Treasury bills) and bills of exchange of the Finance Ministry that have been pledged for this purpose (a new instrument). By introducing this instrument, the CNB aims at enhancing the adjustment of banks to liquidity oscillations, which will consequently diminish negative effects of these oscillations on interest rate movements and prevent exaggerated reactions of depositors on the smallest indication of, be it only a temporary, disturbance in liquidity of a certain bank.