Croatia

Though headline inflation spiked higher in January, to 3.4% y-o-y from 2.9% the previous month, we believe that this largely owes to seasonal effects, and hold to our medium-term disinflation view. Indeed, with the economy sliding into recession and growth in money supply continuing to trend down, core inflationary pressures will continue to ease through the year. What is more, with commodity prices (particularly oil) remaining under considerable pressure through the medium term as global consumption comes off the boil, headline inflation will continue to trend lower. As a result, we expect inflation to slow to 1.1% by end-2009, with an improvement in domestic and external demand to drive consumer price growth up to 1.6% by end-2010.

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