1. What does the forecast of the NBU’s key policy rate show?
The key policy rate forecast is part of the NBU’s macroeconomic forecast. The projected path of the key policy rate is consistent with other projected indicators, in particular inflation, which should reach its medium-term goal (5%) during the period for which the NBU’s monetary policy has the most impact on inflation (9–18 months). The NBU updates its forecast of the key policy rate every quarter, along with other indicators, and publishes it in its Inflation Report.
2. Why does the NBU publish its key policy rate projections?
The publication of the projected key policy rate along with other macroeconomic indicators increases the transparency and predictability of monetary policy. The forecast of the key policy rate enables financial market participants to see how the regulator plans to use its monetary policy to bring inflation to the target.
Market participants can also see how the NBU changes the projected trajectory of the key policy rate as new information emerges and assumptions underlying the macroeconomic outlook shift. Understanding the logic behind the NBU’s decisions allows market participants to draw conclusions about its further policy. In addition, the greater transparency and predictability of monetary policy contributes to:
- the improved understanding by economic agents of the NBU’s future monetary policy and its macroeconomic projections. Better awareness helps individuals make more prudent investment decisions
- the stronger impact of the key policy rate on market interest rates, the cost of financial resources, and inflation. Information about the central bank’s expectations enables financial market participants to adjust their own expectations about the future value of financial resources. In this way, the central bank affects the entire yield curve. Furthermore, the clarity and predictability of monetary policy contributes to reducing uncertainty, thus diminishing the risk premium included in the cost of loans, yields on debt securities, etc.
3. Has the NBU made forecasts of the key policy rate before?
Yes, it has. The key policy rate forecast is an integral part of the NBU’s macroeconomic outlook. In the models the NBU uses to make projections, the projected trajectory of the key policy rate figures in all other indicators it affects, and vice versa. Therefore, the NBU’s Monetary Policy Committee has discussed key policy rate projections in the past.
4. Why hasn’t the NBU published the key policy rate forecast earlier?
Increasing the transparency of monetary policy is an evolutionary process. The degree of openness of information should be in line with the quality of analytical support for decision-making and the level of discussion in the central bank itself, and with the ability of financial market participants published information.
5. When and where ?
The NBU will publish the forecast of the key policy rate for the current and next two years, together with other macroeconomic indicators, in press releases on monetary policy decisions and in the Inflation Report on a quarterly basis. The NBU will publish forecasts of the average quarterly value of the key policy rate in the form of a graph showing the value of the key policy rate under the baseline scenario and the probability distribution of the values of the key policy rate. In addition, the Summary of the Key Policy Rate Discussion by the NBU Monetary Policy Committee.
6. Who approves the NBU’s key policy rate forecast, and how do they do it?
The key policy rate forecast is a component of the NBU’s macroeconomic outlook, which.
7. Can the NBU Board set the key policy rate at a level that is different from the forecast? What informs this decision?
When it makes its key policy rate forecast, the NBU does not commit to adhere to the published trajectory. If new factors arise or existing risks strengthen or weaken, the NBU Board may approve a decision that will result in the key policy rate deviating from the projected trajectory. These deviations can cause changes in the assessment of risks to the NBU’s inflation targets and other targets, including the risk of the appearance of internal and external factors that the NBU did not foresee in the macroeconomic outlook. These deviations can also cause other indicators to deviate from their projected values.
8. Can the NBU revise the projected trajectory of the key policy rate?
The key policy rate is the main monetary instrument used by the NBU to bring inflation to its target. If the assumptions underlying the inflation forecast change, the inflation forecast will change, and the NBU will need a different key policy rate trajectory to bring inflation to the target. As a result, the NBU will revise its projection of the key policy rate.
The figure below shows this clearly. Starting in Q3 2017, the NBU has revised upwards the projected trajectory of the key policy rate every quarter as inflationary pressures increased, and thus the actual level of key policy rates deviated from previous forecasts. The NBU’s decisions to implement tighter monetary policy met the need to reduce inflation and bring it to the target.
NBU key policy rate: actual level vs forecast,%
9. Why does the NBU publish the forecast as a fan chart? How to read this chart?
In order for financial market participants to take into account the uncertainty and contingent nature of the forecast, the NBU will publish the forecast in the form of a fan chart. The NBU has already been using this type of graph to display its projections of inflation and real GDP. The central line of the graph shows the forecast of the key policy rate under the baseline scenario, while the bands around the central line are confidence intervals. The intensity of the color of the confidence interval bands varies from the darkest (the area around the central line) to the lightest, reflecting the probability that the actual level of the key policy rate will lie within a certain range of values.
10. Who can benefit from the use of information about the NBU’s key policy rate forecast?
Most economic decisions depend, directly or otherwise, on the predictability of monetary policy, and so information about the forecast of the key policy rate is useful to all categories of the NBU’s stakeholders, in particular:
- to financial analysts, so that they can understand the NBU’s monetary policy response function and macroeconomic forecasts in order to make assumptions and make their own forecasts
- to investors, so that they can make informed decisions on future investments
- to banks, so that they can effectively manage their liquidity and develop interest rate policies of their own
- to businesspeople, so that they can make sound decisions on the future development of their businesses, investments in financial assets, and attraction of credit financing
- to individuals, so that they can make decisions regarding their savings (in particular, whether to buy government securities) and expenses.
11. Is publishing key policy rate forecasts a worldwide practice?
The NBU has become the world’s eighth central bank to publish key policy rate forecasts. Seven of the forty inflation-targeting central banks forecast their key policy rates: the National Bank of Georgia, the Reserve Bank of New Zealand, Norges Bank, the Bank of Israel, the Central Bank of Iceland, Česká národní banka, and Sveriges Riksbank. Their experience speaks to the benefits of this approach. In particular, greater transparency and predictability of monetary policy inspires the confidence of financial market participants and thus makes it easier for the central bank to meet its inflation target.