Minister, HNB governor believe inflation criterion for euro area entry to be met

NEWS 04.05.2022 20:30
Source: Pixabay

Finance Minister Zdravko Maric and Croatian Central Bank (HNB) Governor Boris Vujcic on Wednesday expressed optimism regarding the fulfilment of the inflation criterion for euro area entry, with Vujcic saying that it would be unusual for Croatia to be asked to have an inflation rate below the current euro area rate.

Speaking at the 15th session of the National Council for the introduction of the euro as legal tender in Croatia, Maric recalled that a few days ago the government sent a convergence programme to Brussels and now it expected an assessment and a report to be published by the European Central Bank and the European Commission, to be followed by the checking of compliance with the Maastricht criteria, with the focus being mostly on inflation.

Maric said that the average inflation in Croatia for the first three months of 2022 was 6.3%, which, he said, was the euro area average and slightly below the EU average.

The Maastricht criteria refer to exchange rate stability, price stability, interest rate stability and two important indicators related to public finance – budget deficit and public debt.

Under the Maastricht criteria, the assessment refers to the inflation rate in the last 12 months, but not in relation to the general average but to the average of three countries with the lowest inflation rates. That means that Croatia should have an inflation rate that is a maximum 1.5 percentage points above the average inflation rate in the three EU countries with the lowest inflation, Maric said.

He added that the EC and the ECB have the right to exclude some of the countries from the calculation at their own discretion, which, he said, happened in 2014.

Maric said that without wishing to prejudge anything, he believed that European partners fully understood that the increased inflation in Croatia did not in any way differ from the situation in the EU.

“In anticipation of data on inflation in April…. we firmly believe that Croatia will meet that remaining criterion,” he said.

The target date for Croatia’s entry to the euro area is 1 January 2023.

Vujcic: Importance of euro area membership in times of crisis

HNB Governor Vujcic said that the reference value a country must comply with to join the euro area had so far never been lower than the average inflation in the euro area.

“If that is so, Croatia too should be able to meet the criterion because it would be a little odd to demand that it should have a lower inflation rate than the euro area which it is joining,” he said.

He underlined the importance of euro area membership in times of crisis, noting that crises were easier to overcome and the consequences were significantly fewer for euro area members.

Croatia’s lagging behind in terms of growth in the last decade is due to the fact that in crises its decline was much larger than in other countries, he said, noting like Maric, that euro introduction would not cause additional inflationary pressure.

Asked where after the introduction of the euro, kuna coins would be stored, Vujcic said that a solution would be found in cooperation with the Defence Ministry, to be announced after it was determined how they would be stored.

Vujcic also reported that trial euro coins with the national sides that had been approved had already been made and that after a decision on Croatia’s euro entry in July, full production should be launched.

First increase in interest rates by ECB possibly in July already

Given that the US Fed Bank has already started a cycle of increasing interest rates, reporters asked Vujcic if the ECB planned the same move, to which he said that last year already he had announced that we could expect a gradual increase in interest rates in 2022 and that the effects were already visible on the bond markets.

When it comes to the ECB, it first plans to halt the programme of quantitative easing by the third quarter of this year, after which interest rates will increase. “We don’t know when that will be, however, it is possible that the first increase in interest rates by the ECB could be as early as July,” Vujcic said.

He explained that a good part of what will occur with increased interest rates of central banks has already impacted the market, which anticipated it. “When something is announced, financial markets don’t wait for that to occur but immediately incorporate it in the price,” Vujcic said, adding that it was usual in periods of growing inflation for central banks to respond by increasing interest rates.

In mid-April, the Ministry of Finance released euro bonds on the international capital market with a total nominal value of €1.25 billion, a maturity of 2032, an annual coupon interest rate of 2.875% and a real yield of 2.975%.

If they were to be issued today, the reference interest rate would be 33 base points higher, which means they would be 0.33% more expensive, hence about €4 million will be saved on interest each year, Minister Maric underlined to illustrate the volatility of the market, due also to the war in Ukraine.

PM: Croatia’s economy most euroised of all EU economies

During the meeting of the National Council, chaired by Prime Minister Andrej Plenkovic, the PM presented the design of the national side of the €1 coin and a final bill on euro introduction, to be sent to the parliament on Thursday for second reading.

At the meeting, reports were submitted on the progress made in implementing activities related to introducing the euro.

Plenkovic said that euro introduction and accession to the Schengen Area were two strategic goals for deeper integration with the EU.

He said that Croatian citizens and the economy would benefit from membership in the euro area, underscoring that Croatia’s economy was the most euroised of EU economies outside the euro area.

Euro deposits account for 76% of total savings and term bank deposits, 47% of kuna loans are pegged to the euro while countries of the euro area account for 53% of commodity exports and 59% of commodity imports, he said.

Plenkovic recalled that last week the government said that it foresees a GDP growth of 3% this year and a budget deficit of 2.8% of GDP, to fall to 1.6% in 2023 and 1.2% in 2024. At the same time, public debt should also be reduced to 76.2% this year, 71.7% in 2023, 68.9% in 2024 and 66.9% in 2025.

“All this has to be viewed in the context of changed circumstances and growing energy prices, which impacts all processes,” said Plenkovic, recalling last week’s estimate of a 7.8% inflation rate this year.

He stressed that nine measures in four areas had been met as part of the action plan to participate in the European Exchange Rate Mechanism II (ERM II). They are related to preventing money laundering, a more favourable business environment, improved management of state-owned companies and strengthening the bankruptcy framework.

We believe that this comprehensive approach will make it possible for all key and final decisions about Croatia’s accession to the euro area to be made at the EU and euro area levels in June and July, said Plenkovic.

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