CBA Analysis no. 30

A drop in interest rates began in Croatia last year. During that time, the drop in interest rates in the Eurozone was halted, and rates again began to converge towards the usual levels in the Eurozone. Convergence was slow and more pronounced in the household sector and on the side of lending. Interest rates on deposits were far above the EU average, or even outside the Eurozone interval, at least with respect to household sector deposits. Corporate deposits earn a relatively small interest rate in comparison to the Eurozone average. On the other hand, interest rates on housing loans fall within the Eurozone interval, or just above its upper limit, as though Croatia is already a new member.
However, short-term interest rates on corporate loans lie above the upper interval limit, and long-term rates continue to lie around the upper interval limit. Risk is the main factor, which explains these differences in the interest rate range. The rigidity of country risk premiums and the growth in interest rates of the ECB have raised barriers for interest rates to return to their pre-crisis levels. For that reason, the final convergence will likely require removal of structural weaknesses, which are the reasons why country risk premiums and risk costs for individual loans are higher than the EU average.

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