The Deputy Governor of the Croatian Central Bank (HNB), Sandra Svaljek, said on Thursday that all inflation indicators are decreasing in Croatia and that inflation in Croatia could decrease to seven percent in 2023, with continued slowdown in 2024, and to 2.2 percent in 2025.

Speaking at the 26th conference Financial Market, Svaljek said that all inflation indicators are decreasing in Croatia, and the inflation expectations of consumers and companies are also decreasing.

She stated that inflation in the euro area and in Croatia has been falling quite steadily, in Croatia for five months in a row and is now at 8.9 percent, which is higher than the euro zone average, but the difference is decreasing.

She pointed out that in April, for the first time in a long time, Croatia had a lower inflation rate than Slovenia and Austria, and among the eurozone countries, the Baltic countries and Slovakia had higher inflation.

This indicates a strong decrease in price growth in Croatia, but it is still high inflation, so there is still a lot of work to do, she said.

Svaljek said that in the beginning inflation was dominantly influenced by the prices of energy and raw materials, and today other pressures appear, primarily from the labor market, but also from ​​intermediate goods, into which the prices of raw materials that rose at the beginning of inflation were incorporated.

Because core inflation, when food and energy prices are taken out of it, is so elevated, it actually indicates that there is still room for monetary policy to reduce overall inflation, she said.

Interest rates on loans are rising, but are lower than in the rest of the eurozone

Speaking about loans, she said that there is steady growth in loans to businesses and households, as well as an increase in interest rates on newly approved loans. However, in Croatia, this increase is lower than in the eurozone countries, because we have a specific situation, and with the entry into the eurozone, several factors have influenced the rise of interest rates in our country to be much milder and slower than in the rest of the eurozone.

She stated that because of this credit activity is still quite strong, but there is a certain weakening of the demand for loans among companies and households, and banks are tightening the approval of loans to some extent.

She assessed that the overall economic situation is better than expected, entry into the eurozone and Schengen area contribute to increased optimism, and the improved economic prospects make it difficult to slow down inflation.

The strong labour market creates pressure on inflation, the unemployment rate in Croatia is falling, so for the first time in many years the number of unemployed has fallen below 100,000, there is a great demand for labour.

In Croatia, interest rates on loans to non-financial companies have equaled those in the euro area, she said and emphasized that today Croatia has lower interest rates on newly approved loans to non-financial companies and individuals than, for example, Italy or France.

The structure of housing loans protects most borrowers from rising interest rates, she said, adding that in Croatia we have a good portion of loans with fixed interest rates, so we have the lowest share of variable interest rates for housing loans in new contracts.

She pointed out that the interest rates of domestic banks continue to rise and the tightening of loan approval standards continues, but lending is still relatively stable.

The deputy governor concluded that overall inflation is gradually decreasing under the influence of falling prices of energy and raw materials, core inflation is still stable, and more favourable economic trends and a strong labour market make it difficult to lower inflation. Projections expect only a gradual lowering of inflation towards the target level, a stricter monetary policy is possible, but it should be used so that “the landing would not be too hard”.

She added that the ECB has launched the strongest cycle of monetary policy tightening so far, but Croatia has not yet been fully affected, the transfer to interest rates in Croatia has been delayed, and credit activity is still relatively stable.

The two-day conference was organised by the Croatian Banking Association in partnership with the Croatian National Bank and the Croatian Financial Services Supervision Agency.