IFIS for the first quarter of 2022: Tightening of the financial conditions index

The value of the IFIS index rose in the first quarter, indicating a tightening of financial conditions. The tightening of financial conditions was predominantly driven by the tightening of the foreign index component in the first quarter. Worsened global financial conditions were influenced by movements on world markets, which were reflected in the IFIS index through a decrease in the values of the DAX and the S&P 500 indices in the first quarter. The worsened global financial conditions were also affected by the Russian invasion of Ukraine, inflationary pressures, the fact that the Federal Reserve increased interest rates in March for the first time since 2018, similar expectations related to other major central banks, and expectations related to future economic growth rates. The tightening of financial conditions caused by foreign component growth was also driven by an increase in credit default swaps of parent banks due to exposure to the Russian market. The domestic index component recorded a mild tightening of financial conditions in January compared to the end of 2021, followed by easing again in February and March. The domestic market preserved favorable financing conditions and high liquidity of the domestic financial system in the first quarter. The stability of the financial system enabled the financial conditions to remain mild on the domestic market in the first quarter, despite growing inflationary pressures and increased risk premium for Croatia in March.

In the upcoming period, there is a risk of worsened financial conditions on international financial markets and higher domestic interest rates due to expected and initiated tightening monetary policy measures by leading central banks. In that sense, an additional source of uncertainty is sustainability of debt, which depends on the speed of economic recovery and the level of real interest rates. China’s zero-COVID policy is hindering the normalization of global supply chains, which is negatively affecting inflation and economic growth expectations. Besides inflationary pressures caused by geopolitical circumstances related to the Russian invasion of Ukraine and sanctions imposed on Russia, uncertainty on the domestic market is also fueled by growing residential real estate prices.


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.