IFIS index

Source: The Institute of Economics, Zagreb
Note: The index is standardized. An increase in the IFIS signifies a tightening of financial conditions.
Source: The Institute of Economics, Zagreb

Note: The index is standardized. An increase in the IFIS signifies a tightening of financial conditions. By construction, the mean of the indices is zero. Consequently, only trends of movements of the components can be compared and not their values.


IFIS for the third quarter of 2022: Further tightening of financial conditions

Tightening of financial conditions in the third quarter of 2022 continues, which is particularly pronounced with the foreign index component. The foreign index component recorded a significant growth compared to the start of 2022 due to unfavorable movements on the world markets, rise of interest rates and rise of credit default swaps of parent banks. Leading central banks have been implementing, in the third quarter, a restrictive monetary policy in an attempt to curb the inflation, which resulted in increased interest rates, unfavorable movements on the world markets and unfavorable expectations about future economic growth.

When analyzing the domestic component of the IFIS index in the third quarter, spillover of unfavorable global financial conditions shows limited scope. Liquidity of the domestic financial system reached a record level in September this year, which can largely be explained by harmonization of Croatian National Bank's monetary policy instruments to instruments of the same kind of the European Central Bank in the process of accession to the eurozone and consequential decrease of reserve requirements from 9 to 5 percent in August. Interest rates on the domestic financial market, which are integral index variables, have mostly not recorded a significant growth in the third quarter of 2022. At the same time, inflation pressures continued to grow stronger.

In the remainder of the year, further worsening of financial conditions on the international financial markets is expected, due to uncertainties coming from different sources, including expected further increase of interest rates, inflation pressures, the war in Ukraine, energy crisis and forthcoming winter, as well as geopolitical tensions among China, Taiwan and the USA. All these factors simultaneously increase negative prospects for the global economic growth. It is expected that, in the rest of the year, the global financial conditions will significantly reflect on the growth of interest rates on the domestic market. An additional source of uncertainty on the domestic market is also strong activity on the real-estate market and high prices of residential real-estate, particularly in the part which is the result of demand that is not influenced by the interest rate level.


What is IFIS? 

IFIS is a monthly financial conditions index developed by the Institute of Economics, Zagreb. It provides timely information on the average financial conditions in the economy which can serve as a significant determinant of projections and, consequently, of future economic activity. Financial conditions estimates can be useful for economic activity projections, macroeconomic policy evaluation and financial investment decisions.    

How is IFIS calculated?

Overall financial conditions are influenced by a number of variables. The variables are selected so as to reflect changes in the local and international financial environment, taking into consideration the specific features of the local market. To be able to estimate the developments in financial conditions based on the large clusters of variables, it is necessary to extract data from various parts of the financial system into a simple and easily understandable index. The IFIS index is calculated as the pondered average of variables that represent the fluctuations in the financial system, using the frequently applied method of principal components analysis. IFIS is standardized so that its arithmetic mean equals zero (which is the average index value in the entire observed period), while the standard deviation equals one. Positive values represent harsher financial conditions than the average, and negative ones represent milder financial conditions compared to the average. An increase in the index indicates harshening financial conditions, while a decrease indicates milder financial conditions.

The development of the IFIS index was supported by the EIZ Club, Agrokor, Atlantic and Privredna banka Zagreb.


Attached documents