Monetary policy instruments

Published: 29/2/2016 Modified: 2/10/2017
In implementing its defined monetary policy, the Croatian National Bank uses instruments and measures required to regulate the banks’ lending activity and liquidity as well as to control the amount of money in circulation. In addition, the Croatian National Bank adopts measures related to interest rates.

The Croatian National Bank uses monetary policy instruments to achieve its primary objective – maintaining price stability. Price stability in Croatia is maintained using instruments which affect the stability of the nominal exchange rate of the kuna against the euro as the nominal anchor. Exchange rate stability has been chosen for historical reasons which influenced the extremely high level of euroisation resisting the use of interest rates as the basic instrument for achieving price stability.

In a small, open, highly euroised economy such as Croatia, international capital flows strongly affect exchange rate movements. As a result, exchange rate instability in existing contractual relationships would adversely affect the country's macroeconomic stability. Monetary policy instruments have therefore been adjusted in a manner which ensures exchange rate stability. In that way, the interest rate has implicitly been determined as the interest rate of the country to the currency of which the domestic currency is indexed, increased by the risk premium.

The framework for monetary policy implementation of the Croatian National Bank comprises the following range of instruments:

  • Open market operations
  • Reserve requirements
  • Standing facilities
  • Other instruments and measures

By monetary policy instruments, the Croatian National Bank increases (provides) or decreases (sterilises) liquidity. Liquidity is increased by purchasing assets or granting loans, while the decrease in liquidity is achieved by utilising reserve requirements and selling assets or issuing securities of the Croatian National Bank. Loans granted by the Croatian National Bank are secured by financial instruments (collateral) such as debt securities, and the list of eligible collateral is published in advance.

Only the credit institutions which are subject to reserve requirements can be accepted as counterparties in open market operations and standing facilities. The same applies for other instruments and measures as well.

Monetary policy instruments

Category of monetary policy operations Type of instrument Maturity Frequency Procedure
Provision of liquidity Absorption of liquidity
Open market operations
Regular operations Reverse transactions:
  • Collateralised credit
  • Repo transaction
  • Foreign exchange swap
Outright transactions:
  • Securities purchase
  • Foreign currency purchase
Reverse transactions:
  • Repo transaction
  • Foreign exchange swap
  • Fixed-term deposits
  • Debt securities of the CNB
Outright transactions:
  • Securities sale
  • Foreign currency sale
1 week Weekly Standard tender procedures
Fine-tuning operations Non-standardised Non-standardised Standard or quick tender procedures bilateral procedures
Structural operations
Standing facilities
Overnight credit Reverse operation (collateralised credit) - Overnight At bank initiative
Overnight deposit - Reverse transaction (fixed-term deposit)

Source: CNB