Updated November 17, 2004
HOW IS THE KUNA EXCHANGE RATE SET?
Croatia implements the exchange rate regime of managed floating, where
the exchange rate of the domestic currency is not fixed against another
foreign currency or basket of currencies, but is rather freely determined
by the foreign exchange market. The exchange rate thus floats depending on
the foreign exchange supply and demand on the foreign exchange market.
However, the Croatian National Bank prevents too excessive exchange rate
fluctuations by occasional market interventions in an attempt to maintain
relative stability of the exchange rate.
HOW IS THE CNB
MIDPOINT EXCHANGE RATE FORMATED?
The CNB sets the value of the kuna against other currencies each workday,
based on the stipulated turnover and foreign currency exchange rates in
the foreign exchange market. This value is posted on the CNB
exchange rate list. The basic currency used for compiling the CNB exchange
rate list is the euro.
The HRK/EUR midpoint exchange rate posted on the CNB exchange rate list is
the arithmetic mean of the weighted buying and the weighted selling
exchange rate of banks. These rates are based on the turnover in all
currencies and the exchange rates of all currencies, agreed one workday
before the midpoint exchange rate is set.
The value of the kuna against the currencies included on the CNB exchange
rate list, other than the basic currency, is determined by dividing the
HRK/EUR midpoint exchange rate by the ratio between the euro and all other
currencies, valid in the world's foreign exchange market at 12.00 on the
day the exchange rate list is compiled.
WHAT IS THE MAIN
EXCHANGE RATE POLICY
INSTRUMENT OF THE CROATIAN NATIONAL BANK (CNB)?
The main foreign exchange policy instrument of the CNB are foreign
exchange auctions through which the central bank purchases or sells
foreign exchange to commercial banks. The most common type of these
auctions are auctions at which commercial banks indicate in their bids to
the CNB the desired amounts (in EUR) and the price (exchange rate) of
foreign exchange transactions. On the basis of the bids received, the
central bank adopts a decision on the amount of the intervention and the
exchange rate.
WHEN DOES THE CNB PURCHASE AND WHEN
DOES IT SELL FOREIGN EXCHANGE?
The CNB participates in foreign exchange market transactions in order to
prevent excessive exchange rate fluctuations in both directions. The CNB
thus sells foreign exchange in the periods of kuna depreciation -
withdrawing kuna from circulation due to which the kuna value increases
(the exchange rate appreciation). In contrast, the CNB purchases foreign
exchange in the periods of kuna appreciation - putting thus more kuna into
circulation as a result of which the kuna value decreases (the exchange
rate depreciation).
IS THE CNB'S INFLUENCE THROUGH
FOREIGN EXCHANGE
INTERVENTIONS CRUCIAL FOR THE EXCHANGE RATE LEVEL?
No! The central bank's foreign exchange interventions account for a very
small portion of total purchases and sales on the foreign exchange market.
ARE THE
EXCHANGE RATE FLUCTUATION BANDS
PREDETERMINED?
The CNB does not predetermine the lower and upper level of the kuna
exchange rate it is committed to defend (the upper and lower intervention
point).
WHY IS IT IMPORTANT TO MAINTAIN THE
KUNA EXCHANGE RATE STABILITY?
The CNB maintains the stability of the kuna/euro exchange rate in order
to meet its primary objective of maintaining price stability. More
specifically, in highly euroised economies, such as Croatia's, prices are
very sensitive to exchange rate fluctuations. The exchange rate movements
also influence household inflationary expectations, which are pronounced
in particular as a result of Croatia's previous experience with high
inflation.
HAS THE EXCHANGE RATE STABILITY BEEN
SUCCESSFULLY MAINTAINED SO FAR?
The exchange rate of the kuna against the German mark and euro
fluctuated within a narrow band of plus/minus 6% around the average
exchange rate in the period from kuna introduction on 30 May 1994 until
present time.
