IFIS for the second quarter of 2022: Continued tightening of financial conditions index

IFIS index has continued growing in the second quarter of 2022, pointing to continued tightening of financial conditions which started at the beginning of this year. Tightening of financial conditions has been recorded with both domestic and foreign index components. The domestic index component has continued with the trend that started in January by recording mild tightening of financial conditions due to more pronounced inflation pressures and increased risk premium for Croatia. At the same time, favorable financing conditions and high liquidity of the domestic financial system remain to be present at the domestic market. The liquidity has, however, slightly decreased in the second compared to the first quarter of this year. Unfavorable movements on the world markets have contributed to significant worsening of financial conditions recorded by the foreign index component in the second quarter. Geopolitical risks conditioned by Russian invasion on Ukraine have contributed to stronger inflation pressures, which has resulted in tightening of monetary policy of leading world banks. Tightening of financial conditions due to increased foreign component has also been initiated by growth of credit default swaps of parent banks.

Further worsening of financial conditions at international financial markets is expected throughout the rest of the year, due to continued inflation pressures which are not only limited to food and energy prices, but are spreading to other products and services, as well as to the labor market. Postponement of normalization of supply chains, due to epidemiological measures which are the result of Chinese politics of zero tolerance to coronavirus, presents an additional challenge. It is expected that leading world banks, in their attempts to curb the inflation, will continue to further tighten monetary policy measures, which will additionally tighten the financial conditions. Next to inflation pressures and expected growth of interest rates, an additional source of insecurity at the domestic market are also strong activity on the real estate market and high prices of residential real estate.

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.

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