IFIS index

Source: The Institute of Economics, Zagreb
Note: The index is standardized. An increase in the IFIS signifies a tightening of financial conditions.
Source: The Institute of Economics, Zagreb

Note: The index is standardized. An increase in the IFIS signifies a tightening of financial conditions. By construction, the mean of the indices is zero. Consequently, only trends of movements of the components can be compared and not their values.



The monthly financial conditions index IFIS was calculated up to the end of 2022. The index cannot be calculated for 2023 due to changes in the variables used in the calculation, which are no longer measured or have been significantly changed since Croatia joined the eurozone. The index is currently being reconstructed and we are exploring options to adapt it considering that a significant portion of the time series used for its construction has changed.
 

IFIS for the final quarter of 2022: Tightening of financial conditions compared to the final quarter of 2021


Financial conditions index movement points to significant tightening of conditions at the end of 2022 compared to the end of 2021. Worsening of financial conditions in the final quarter of 2022, compared to the final quarter of 2021, is evident with both domestic and foreign index component, while tightening of the foreign index component is more pronounced. During the entire 2022, the growth of foreign index component, i.e. tightening of conditions, was under strong influence from restrictive monetary policy of leading central banks which influenced the growth of interest rates, unfavourable movements on the global stock markets and unfavourable expectations related to future economic growth. Spill over from global financial conditions onto the domestic index component was recorded in a one-year period, but in a limited amount. The surplus of liquidity on the domestic market considerably increased on the eve of the introduction of euro and accompanying harmonization of Croatian National Bank monetary policy instruments with the same type of instruments of the European Central Bank. In the last quarter of 2022, interest rates on the domestic financial market, which are the index's components, mostly did not record significant growth, particularly those related to expenses of the household borrowing. In the same period, state borrowing expenses have increased, while inflationary pressures remained pronounced.

Uncertainty in the global environment will remain pronounced in 2023 which will be reflected in further worsening of financial conditions on international financial markets. Next to sources of uncertainty inherited from last year, such as further increase of interest rates, inflationary pressures, war in Ukraine and unfavourable expectations related to future economic growth, the first quarter of 2023 is also marked with the consequences of interest rates' growth on weaker management and overseeing of certain banks' portfolios, which can present a threat to financial stability. On the domestic market, it is expected that, in 2023, there will be a significant overspill of global financial conditions and accompanying influence on the growth of interest rates. Strong activity and high prices of residential real-estate increase uncertainty on the domestic market, particularly in that part which is the result of demand not under the influence of interest rate levels.  


 

What is IFIS? 

IFIS is a monthly financial conditions index developed by the Institute of Economics, Zagreb. It provides timely information on the average financial conditions in the economy which can serve as a significant determinant of projections and, consequently, of future economic activity. Financial conditions estimates can be useful for economic activity projections, macroeconomic policy evaluation and financial investment decisions.    
 

How is IFIS calculated?

Overall financial conditions are influenced by a number of variables. The variables are selected so as to reflect changes in the local and international financial environment, taking into consideration the specific features of the local market. To be able to estimate the developments in financial conditions based on the large clusters of variables, it is necessary to extract data from various parts of the financial system into a simple and easily understandable index. The IFIS index is calculated as the pondered average of variables that represent the fluctuations in the financial system, using the frequently applied method of principal components analysis. IFIS is standardized so that its arithmetic mean equals zero (which is the average index value in the entire observed period), while the standard deviation equals one. Positive values represent harsher financial conditions than the average, and negative ones represent milder financial conditions compared to the average. An increase in the index indicates harshening financial conditions, while a decrease indicates milder financial conditions.

The development of the IFIS index was supported by the EIZ Club, Agrokor, Atlantic and Privredna banka Zagreb.

 

Attached documents

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