Vujčić: We expect the trend of decreasing inflation to continue

The Governor of the Croatian National Bank (CNB), Boris Vujčić, said that he expects the trend of slowing inflation on an annual basis to definitely continue and that it should be 2.2 percent next year, which is around the target level.

The CNB today published its latest macroeconomic projections, in which it forecasts that the Croatian economy will grow by 3.3 percent this year and 2.9 percent next year, while inflation should be 2.8 percent this year and 2.2 percent in 2026.

According to Governor Boris Vujčić, the expected GDP growth rate, although lower than last year when the economy grew by 3.9 percent, remains strong, with growth relying on domestic demand, which is reflected in personal consumption and inflows from European funds.

“Domestic consumption will also be supported by real wage growth, which will also slow down compared to last year, but will still be relatively high. Thus, after last year's growth of 11.4 percent, real wage growth this year should be around 6.5 percent. The governor noted that this growth is expected to be primarily in the private sector this year.

Around 50,000 new jobs this year

There is still strong employment growth, the CNB expects it to grow by 2.8 percent this year, so it is expected that around 50,000 new jobs will be created in Croatia in 2025.

“Most of these jobs,” Vujčić noted, “will be filled with foreign workers, which has been a characteristic of the Croatian labor market for several years.”

When it comes to inflation, the CNB expects it to continue to gradually decrease, so that this year, measured by the national indicator, it will amount to 2.8 percent, and next year it will slow down to 2.2 percent. “This means that in 2026 it should practically be at the targeted growth level of around two percent,” said Vujčić on the margin of the CNB's 31st International Economic Conference in Dubrovnik.

He added that this does not mean that inflation trends will not vary from month to month, but that the central bank expects the trend of decreasing inflation on an annual basis to definitely continue.

Namely, according to the first estimate of the Croatian Bureau of Statistics published this week, the growth of inflation on an annual basis accelerated to 3.5 percent in May, and according to Vujčić, this was primarily influenced by the rise in food prices, which also happened in the Eurozone.

“However, in Croatia, food has a larger share in the "basket", so it has had a greater impact on the growth of inflation. In Croatia, unlike the Eurozone, energy prices have also increased, which is also a consequence of the partial abolition of administrative price restrictions,” the governor noted.

The European Central Bank (ECB), which runs a single policy for the entire Eurozone, continued to reduce interest rates this week, at a time when inflation has reached the target level of around two percent, while on the other hand, Croatia has one of the highest inflation rates in the European Monetary Union.

Asked whether such an ECB policy is fueling the growth of inflation in Croatia, Vujčić said that he does not expect it to significantly change the CNB's projections.

Long-term effects of the measure to tighten lending conditions

In the context of the expected slowdown in inflation, Vujčić reminded that measures to tighten consumer lending criteria will come into effect on July 1.

“They will further 'suppress' personal consumption, so that will also contribute to the downward trend in the inflation rate,” believes Vujčić.

Asked to what extent the announcement, and then the three-month delay in the application of these measures, influenced the growth of lending, given that citizens wanted to take advantage of the opportunity to take out loans before the stricter measures came into effect, which was encouraged by banks by lowering interest rates, Vujčić said that there will certainly be slightly more approved loans this quarter, especially housing loans.

However, he stressed that this is a measure that will start to "bite" from next month and will have long-term effects on the demand for loans, more consumer than housing, with the current increase in lending not significant when looking at this long-term perspective.

He also noted that the implementation was postponed for three months primarily so that those currently in the process of approving loans can complete their procedures, and on the other hand so that banks and the Croatian National Bank can adjust their IT systems.

When asked by a journalist whether price increases were also expected due to the upcoming peak tourist season, Vujčić said that it was difficult to predict at this time, but he also reminded that in the last three years Croatia has had twice the price growth of its competitors in the Mediterranean, which is why it has started to lose market share, while a decline in real consumption is also being recorded.

“This is a clear message about what is happening with relative competitiveness in terms of prices, but tourism and hospitality workers are the ones who set prices,” he said.

Among other things, he said that, in the current conditions, the ECB's cycle of lowering interest rates is nearing an end.

“But of course, if there are surprises in the form of rising inflation or falling GDP, this would also affect further decisions on interest rates, with trade and customs policies representing the greatest uncertainty,” added Vujčić.

Dubrovnik Economic Conference

The Dubrovnik conference is a traditional meeting and place of dialogue between the academic milieu, i.e. distinguished international and domestic scientists with representatives of international financial institutions, central banks and the financial sector.

The first day of the conference is dedicated to the experiences of so-called quantitative easing and quantitative tightening in monetary policy, inflation in the era of the pandemic and interest rate uncertainty in the US, target inflation as a global monetary standard, and the question of whether exchange rate wars will follow trade wars.

On the second day of the conference, the communication of central banks and their digital currencies and the impact of climate change on the banking system will be discussed.

Source: HRT