The increase in European Central Bank (ESB) interest rates was expected and it will not have any significant effect on Croatian citizens and the economy, Croatian Central Bank (HNB) Governor Boris Vujcic and Finance Minister Marko Primorac said on Thursday.

The two officials made the statement after a meeting of the national council for the introduction of the euro as the official currency in Croatia.

HNB Governor Vujcic said that for now “no significant” effect is expected because today’s increase in interest rates has nothing to do with Croatia’s entry into the euro area.

Entry has the opposite effect and it will reduce financing costs and interest rates, said Vujcic, who noted that banks will have their reserve requirement ratio reduced by December and the obligation related to the minimum required foreign currency receivables will be abolished, which will free up 34.2 billion kuna and €5billion.

That will then reduce financing costs for banks, and they are already announcing that, regardless of the current increase in Euribor, they will not increase their interest rates, Vujcic said.

However, if the cycle of raising interest rates in the euro area continues in September and October, at some point it is possible that it will “spill over to the variable part, with the increased Euribor,” he said.

Vujcic noted that an increase in the reference interest rate by one percentage point would mean that the cost of a housing loan would increase on average by 1,800 kuna and a cash loan by 400 kuna annually.

He added that interest rates for companies in Croatia are continuing to fall and are at historically low levels, which is also contributed to by the fact of joining the euro area.

“If we didn’t join the euro area now, interest rates would have already been significantly higher,” Vujcic said, noting that EU countries that aren’t in the euro area as an example.

Primorac: Try to switch variable interest rates to fixed ones

Primorac said that the increase in interest rates was expected, adding that monetary policy is much more effective than fiscal policy in the fight against inflation.

He added that, had Croatia not received such positive news from credit rating agencies and had not been accepted to the euro area on 1 January 2023, “interest rates would have been even higher.”

He told citizens and entrepreneurs to try and eliminate existing risks and to replace variable interest rates on loans by fixed ones.

Although increasing interest rates is an effective way to fight inflation, it can also have an effect on the reduction of economic growth, and there are fears that a significant increase can lead to a recession, Primorac noted.

Primorac comments on EC request for gas savings

On Wednesday, the European Commission presented the “save gas for a safer winter” plan, which envisages a 15% reduction in gas consumption in the period from 1 August 2022 to 31 March 2023.

Replying to reporters Primorac said that Croatia will join this plan, and appealed to the media to communicate these messages. That is the only effective solution to reduce dependence on Russian energy sources, and similar measures are also being introduced by other developed Western countries, noted Primorac.

Director-General of the Croatian Employers’ Association (HUP) Damir Zoric noted that at the moment it would be irrational not to not about savings, but on the other hand, it would be even less rational not to think about how to maintain the economy, which is the primary goal.

“If the economy caves in, then we are in an even bigger problem,” Zoric added.

Unionist Vilim Ribic said he believes that these recommendations are “trivial.” “Of course, we have to save now and there is no doubt about that,” said Ribic.

With reference to the increased ECB interest rates, the real question is not whether they should increase but whether that will produce effects, said the union leader.