Monetary Policy in Croatia: Challenges in the Medium Term

Abstract

Croatian monetary policy is based on the exchange rate anchor and any serious disorder of the exchange rate of national currency kuna against to euro could cause problems for the stability of whole financial and economic system. Such a strong relation between exchange rate and general economic stability primarily arises from two main reasons: a) potential inflator pressures in import-oriented economy and b) level of euroisation connected with currency induced credit risks (CICR). Generally speaking, the main official goal of the Croatian national bank (HNB) is preserving the stability of the prices and in import-oriented economy the key precondition for prices stability is also the stability of the exchange rate. Second, but no less important reason for preserving the exchange rate stability is very high level of the euroisation of national economy (low level of confidence in the national currency). Although kuna is official currency of payments in Croatia, saving deposits and, consequently, banking loans are mostly nominated in euros. In the last decade Croatian national bank successfully provide the policy of the stabile exchange rate. During the sharpest period of the global crisis, from last quarter of 2008 and first half of 2009, Croatian national bank also operated through the banking capital channel for preserving the liquidity and stability of the financial and economic system. From the other side, global crisis also underlined all the weaknesses of Croatian economic model which is based on the public and private spending instead on private investments, production and export. Croatian national strategy is entering into the European Union and then also, as soon as possible, in European Economic and Monetary Union (EMU), but important precondition for entering into the EMU is to preserve the fiscal and monetary balance, according to Maastricht’s criteria. High level of the public debt and fiscal deficit related to GDP could endanger achieving of this goal in the medium term so entering into the EMU could be postponed. From the other side, the unsustainable relation between public deficit and value of the national currency, and also high level of euroisation, raise the importance of the “quick exit strategy” which means strategy of the adoption of euro as soon as possible. This paper analyzes perspectives, limitations and challenges of the monetary policy in Croatia in the medium term, according to characteristics of the national economy and post crisis global environment.