IFIS for the second quarter of 2021: Continued easing of financial conditions in the second quarter of 2021

Financial conditions continued to ease in the second quarter of 2021. Such a trend has been present since the second quarter of 2020, considering that the last tightening of the financial conditions index was recorded in February and March of 2020, due to the occurrence and spreading of the pandemic caused by the SARS-CoV-2 virus. The easing of financial conditions in the second quarter was influenced by both the domestic and foreign index components. The ongoing expansive monetary policy contributed to the mild financial conditions on the domestic market in the second quarter of 2021. Domestic financing conditions remained favorable, and the traditionally high liquidity of the domestic financial system reached its record levels in the second quarter of 2021. Interest rates remained exceptionally low, resembling pre-pandemic values. The foreign index component eased further in the second quarter of 2021. Favorable movements on world markets continued, driven by progress in vaccination numbers. Financing conditions remained favorable on the global level as well in the second quarter of 2021, and credit default swaps of parent banks continued to decrease, which had a favorable impact on the easing of the foreign index component.

Although it has significantly decreased, the uncertainty linked to the pandemic will remain present throughout the year and will continue to influence financial conditions. Despite the availability of the vaccine, there is uncertainty regarding new variants of the virus resistant to the vaccine, which could prolong restrictive measures and hinder economic recovery. Measures to aid the economy have contributed greatly to easing the consequences of the pandemic, but have also led to an increase in countries’ debt. In that sense, a potential source of vulnerability is sustainability of debt, which will depend on the speed of economic recovery and the level of real interest rates. The risk of financial conditions worsening and of an unfavorable impact on the sustainability of high levels of debt is also caused by increased inflation pressures and possible tightening of monetary policy measures by leading central banks. 

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.

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