CNB Introduces Structural Repo Operations

Published: 9/2/2016

Today the Croatian National Bank informed banks of its intention to conduct the first of the four structural repo operations planned for this year in the following week. These operations are aimed at providing banks with longer-term sources of kuna liquidity at an interest rate competitive to interest rates on other banks’ kuna liquidity sources, with debt securities of issuers from Croatia to be accepted as collateral. This will enable banks to lend to the economy and households in the domestic currency at an increased pace and under more favourable conditions. While the total effect of the structural operations planned will depend on the degree of interest that banks show in this monetary policy mechanism, preliminary assessments are that it will approximately equal a one percentage point reduction in the reserve requirement rate.

The room for the introduction of structural repo operations arises from the growth of current account surplus, coupled with the strengthening of banks’ external positions, evident from the fact that in late 2015 banks' foreign assets exceeded their foreign liabilities for the first time since 2002. Furthermore, the fiscal adjustment process, which is announced to be continuing this year as well, could further boost the expected positive effects of structural repo operations. In addition, an accelerated domestic economic recovery could spur demand for new loans, whose structure has changed in favour of kuna loans: the amount of newly granted household kuna loans has since April 2015 continuously exceeded the amount of foreign currency loans, with the difference growing larger in the last months. Such movements in economic indicators support the stability of the kuna exchange rate and minimise the risks that structural repo operations might pose to its stability.

Structural repo operations could also slightly decrease the level of euroisation in the banking system and, in turn, the currency risk exposure of the economy and consumers. However, the level of euroisation can be reduced substantially only by significantly changing the currency structure of savings deposits.

By introducing structural repo operations, the Croatian National Bank continues with the expansionary monetary policy it has been pursuing for years, which has helped mitigate the negative consequences of the economic crisis by boosting liquidity in the system and lowering the costs of financing for domestic sectors in Croatia.

The Croatian National Bank will continue to maintain the stability of the domestic currency, taking account of the important role of the EUR/HRK exchange rate in preserving the stability of prices and the banking system as a whole. In the unlikely event that depreciation pressures arise, the CNB will use the instruments available to it, including, if necessary, foreign exchange interventions and system liquidity management, to stabilise movements in the EUR/HRK exchange rate.

The first structural repo auction will be held on 16 February 2016, with settlement on 18 February, at a fixed repo rate of 1.8% and with the maturity date of 18 February 2020. The collateral to be accepted by the Croatian National Bank for structural repo operations, as well as for regular weekly repo operation that will continue to be conducted, will be in the form of debt securities of issuers from Croatia, in all currencies, maturing after the repurchase date, under the condition that the issuer or the issue has been assigned a credit rating that is at least equal to the rating of the Republic of Croatia by at least one of the following three international rating agencies: Standard & Poor's, Fitch Ratings or Moody's. A single 5% haircut will apply, for now, to all securities included in the CNB’s list of eligible collateral.