IFIS for the final quarter of 2022: Tightening of financial conditions compared to the final quarter of 2021

Financial conditions index movement points to significant tightening of conditions at the end of 2022 compared to the end of 2021. Worsening of financial conditions in the final quarter of 2022, compared to the final quarter of 2021, is evident with both domestic and foreign index component, while tightening of the foreign index component is more pronounced. During the entire 2022, the growth of foreign index component, i.e. tightening of conditions, was under strong influence from restrictive monetary policy of leading central banks which influenced the growth of interest rates, unfavourable movements on the global stock markets and unfavourable expectations related to future economic growth. Spill over from global financial conditions onto the domestic index component was recorded in a one-year period, but in a limited amount. The surplus of liquidity on the domestic market considerably increased on the eve of the introduction of euro and accompanying harmonization of Croatian National Bank monetary policy instruments with the same type of instruments of the European Central Bank. In the last quarter of 2022, interest rates on the domestic financial market, which are the index's components, mostly did not record significant growth, particularly those related to expenses of the household borrowing. In the same period, state borrowing expenses have increased, while inflationary pressures remained pronounced.

Uncertainty in the global environment will remain pronounced in 2023 which will be reflected in further worsening of financial conditions on international financial markets. Next to sources of uncertainty inherited from last year, such as further increase of interest rates, inflationary pressures, war in Ukraine and unfavourable expectations related to future economic growth, the first quarter of 2023 is also marked with the consequences of interest rates' growth on weaker management and overseeing of certain banks' portfolios, which can present a threat to financial stability. On the domestic market, it is expected that, in 2023, there will be a significant overspill of global financial conditions and accompanying influence on the growth of interest rates. Strong activity and high prices of residential real-estate increase uncertainty on the domestic market, particularly in that part which is the result of demand not under the influence of interest rate levels.