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

Source: CNB