Yesterday afternoon the Croatian National Bank's Governor Zeljko Rohatinski announced that he will leave the Governor position after his second six-year-long mandate expires on 12 July. As the main reason behind his decision he has cited the inability to cooperate successfully with the current Government, which, as he stated, was the conclusion of the Prime Minister Milanovic. His decision is a bit surprising since it seemed from his public appearances in the last months that he would not mind having another mandate as Governor of the CNB.
In his 12 years as head of the central bank he has been successful in maintaining the price stability through keeping the EUR/HRK exchange rate stable. His pre-crisis precautionary measures that have limited the credit growth proved to be one of the decisive factors in assuring the stability of the banking sector even during the crisis.
On the local financial markets we expect short-term reaction to this announcement. HRK could depreciate to EUR to a level of 7.60 due to the closing of the existing market positions, but given that we expect that CNB will continue with its policy of preserving price stability by means of maintaining a stable EUR/HRK rate, announcement driven depreciation pressures on HRK should not persist. However, should the HRK weakening be more pronounced, we expect to see the reaction of the central bank, which has enough FX reserves (currently at EUR 13.9 bn) and other administrative measures available (e.g. mandatory reserve requirement rate) to maintain the FX stability.
Additionally, Rohatinski's successor will most likely be the current Vice Governor Boris Vujcic, which means that the continuity of the current monetary policy should be expected. As regards the money market interest rates, we do not expect significant changes even in the short term amid ample HRK liquidity in the system (at around HRK 7 bn), but it will be interesting to see the market reaction at today's T-bills auction. We cannot exclude that yields would inch down to a lesser degree than originally expected. On the bond market - due to some uncertainties regarding the future Governor - we expect that both domestic and Eurobond yields would increase slightly in the short-term, which will only contribute to the current adverse sentiment. The stabilization of yields is hard to predict due to the current high risk aversion, but yesterday's news should not have a dominant influence.