IFIS for the third quarter of 2019: Financial conditions continue with the mitigation trend

Financial conditions additionally mitigated in the third quarter of 2019. After the index stabilization in 2018, mitigation trend has been present throughout 2019. It should be emphasized that in July 2019 the index reached its lowest level since March 2005, pointing to the mildest financial conditions since the moment when the index started being calculated. Mitigation of financial conditions in the third quarter of 2019 has been recorded in the case of both domestic and foreign factors. Continued improvement of credit loan conditions for the Republic of Croatia contributed to mitigation of the domestic component of the financial conditions index in the third quarter of 2019. Similar to the rest of 2019, interest rates on loans and deposits and short-term interests on the inter-bank market have been recording either stable movements or a mild decrease in the third quarter compared to the previous quarter. Compared to the third quarter of 2018, interest rates on loans and deposits, as well as short-term interests on the inter-bank market, recorded a decrease. Traditionally high level of liquidity of the domestic financial system additionally rose in the third quarter of 2019. Mitigation of financial conditions trend has also been recorded with the foreign index component during the third quarter of 2019. This trend has been present throughout 2019, after a strong tightening in the last quarter of 2018 due to volatility on the financial markets and tensions caused by trade negotiations between the USA and China. Favorable movements on world’s stock exchanges had a positive impact on the improvement of foreign financial conditions in the third quarter of 2019, which were surely also influenced by FED’s decision to additionally lower interest rates on two occasions during this quarter. However, favorable movements of stock indices slowed down towards the end of the third quarter due to increased uncertainty on the global markets following growing trade wars and the current drama surrounding Brexit. An additional decrease in German bond yields has also been recorded in the third quarter, as well as a decrease in credit default swaps of the parent banks, which also had a favorable impact on mitigating the foreign component of the financial conditions index.
 

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.