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ViewpointSeptember 29 2021

Central banks strive for stability within their legal limitations

The Central Bank of Bosnia and Herzegovina has steadied the country’s currency, which has contributed to overall macroeconomic stability.
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Since its creation two decades ago, the Central Bank of Bosnia and Herzegovina (CBBH) has operated under the currency board regime, which limits its monetary flexibility but adds to its credibility. While banking supervision does not sit under the CBBH, but rather two other banking agencies, the central bank carefully monitors financial stability and regularly publishes reports on systemic issues. In addition to the legal limitations that the central bank faces when choosing its appropriate response, there are also country-specific limitations.

In terms of macroeconomic developments, Bosnia and Herzegovina has historically mirrored the trends of our large neighbour and main trading partner, the EU, with low inflation and rather sluggish economic growth, particularly for our level of development. However, liquidity remains high in both the banking sector and the government. Some fiscal space was created in the years before the Covid-19 pandemic, while the level, structure and maturity of the country’s public debt was favourable. The liquidity coverage ratio of our banking sector was more than double of that prescribed in the EU. The excess reserves (not the required ones) held at the central bank, including high-quality liquid assets, were also very high.

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