Credit Growth in Central and Eastern Europe Revisited

This short study builds on earlier work by Égert, Backé and Zumer that analyzes data up to the end of 2004 and presents updated results on the deviations of private sector credit-to-GDP levels from their estimated equilibrium levels in the ten new Central, Eastern and Southeastern European EU Member States and in Croatia. The study uses new data on lending and its determinants until end-2006, which show that the levels of private sector credit to GDP continued to catch up with their long-run equilibrium levels in 2005 and 2006. Moreover, in a few countries, credit levels have already become fairly elevated relative to the underlying fundamentals. The paper discusses implications for policymaking in European emerging economies on the basis of these developments, focusing on the contributions the most important policy domains can make to managing dynamic financial sector deepening and its implications for macroeconomic developments.