The power of openness is economic truth

To receive a portion of criticism on forecasts after the publication of monetary decisions was in the face of significant uncertainty during the Great War by a sad tradition for the NBU. After all, each solution is accompanied by communication, which contains a comparative analysis of the actual development of the economy with preliminary forecasts and the vision of the future and explanation, how the decisions made on the basis of this information will lead to the desired results: low and stable inflation.

Two NBU Critics Critics camps

The first camp is aggressive. The emphasis is on the NBU forecast errors, the wrong model tools, the inability to predict the weather and the crop of cucumbers a year. The expressive feature of this cohort of « experts »: they do not make their own forecasts or make public. Another thing is if this criticism was heard from professional practitioners, but they are not present in this camp.

The second camp is compassionate. Its participants, supporting the NBU’s policy in general, indicate high uncertainty and offer the National Bank not to publish forecasts. Because not everyone understands that the forecast is probabilistic and can confuse it with a promise, and deviation from forecasts can undermine trust in politics. There is no forecasts – there is no criticism, that is, « silent – you will go down for a reasonable. »

Such thoughts are a reason to explain how modern central banks work and why they maintain openness. Macroeconomic forecast is an integral part of it.

Independence = openness

The Independence of the Central Library did not emerge as a prosecuting of technocrats, which is made by the decision -making from politicians. Its provision is the result of a public request formed by centuries. Their beginning can be traced from the devastated repositories of the late Middle Ages, which borrowed gold to the monarchs for the implementation of utopian projects, to print funds for the electorate to create a favorable background in anticipation of elections for politicians from their « camp.

These cases – the consequences of the dependence of the monetary decisions of the Central Bank on politicians – had the same results in the form of financial crises. Without stopping in detail on the usefulness of the central bank’s independence for society, I note that independence should be accompanied by accountability and openness of the CB. In most cases, non -optimal monetary solutions, they were not openly substantiated in terms of achieving macroeconomic stability.

If the CB makes a decision independently, it should clearly explain what purpose it does and what results it expects. Here the role of macroeconomic prognosis is inalienable. Of course, the publication of the macroeconomic forecast is added by the Central Bank of work, but it is worth it. The public sees the picture of the future on the basis of which the decision was made, and how to make this decision will help the Central Bank to reach a mandate on macroeconomic stability.

This is how all the independent and modern CB. In particular, the NBU, publishing a discount rate (eight times a year), accompanies it with a macroeconomic forecast (four times a year) or an assessment of risks for such a forecast (four times a year). If such decisions were made on the basis of a closed forecast, simply with the comment « Trust us, we know what we do », it would lead to:

– the risk of unprofessional analytics within the CB – it would be difficult to detect, because it is impossible to evaluate what you do not see;

– involvement of monetary solutions, that is, the use of monetary tools for other purposes than the mandate of the CB.

Therefore, openness is an integral part of the independence of the CB and its success in ensuring macroeconomic stability. Experts can evaluate how professional forecasts and decisions are made on the basis of it, and to convey their opinion to the public, and it also forms its expectations based on the CB plans.

As a result, even in the face of uncertainty, there is a confidence: despite the fact that quite unpredictable events can occur in the economy, there is an adequate central bank, which has a plan even under such conditions to achieve the result – macroeconomic stability. It is on the basis of this that the trust in modern money is formed, not on the basis of their provision of gold, as it was once.

What should be the quality prediction

The macroeconomic prognosis on which monetary solutions are based should be of high quality. Moreover, when it is open to the public. However, the quality of this forecast cannot be based on the accuracy of the predictions of facts. « Guess – did not guess » – a bad analogy for the macro -forecast. A macroeconomic forecast is a comprehensive exercise that takes into account the relationships between all sectors of the economy.

You can « guess » the value of individual indicators, but not take into account all the consequences of the decision. And monetary solutions are always related to compromises. The most famous of them: by rigid monetary policy, to reduce inflation and maintain macro -stability in the medium -term period or not to respond and allow the revival of economic activity – in the short -term.

Monetary solutions should take into account the balance between the different tasks of the CB. In particular, a qualitative prognosis is needed, which is able to take into account the consequences of different variants of monetary solutions. Quality criteria for macro forerognosis should be:

– Impossibility of grades. If the forecast is constantly different in one way (too optimistic or pessimistic), it indicates its displacement. This is a systemic error that is worth fixing. There may be several reasons: insufficiently calibrated models or a tendency to « tunnel » thinking of developers and those who discuss and adopt such a forecast. That is, most of them have a tendency to think in the same way or the procedure for discussing the forecast;

– The accuracy of the forecast must correspond to or exceed the level of other organizations. If the accuracy is lower, it is a reason to think about whether the prognosis is often updated, whether the proper quality methods are applied, or taking into account the full information available at the time of its preparation.

How accurate the National Bank’s predictions

The NBU regularly analyzes the characteristics of its own macroeconomic forecasts, comparing them with the forecasts of other leading organizations, consensus forecasts and surveys of financial analysts. Usually, the conclusions of such analysis are published in April in the thematic boxing of the inflation report. This year will not be an exception: detailed information will be posted on April 24 according to the schedule.

I am driven by the calculations. It is first and foremost important to evaluate the characteristics of inflation and GDP forecasts. This makes it possible to identify the vulnerable places of the forecast tools, which, in particular, can generate systematic errors in the forecasts, and further adjust them, and the toolkit itself – to improve. In addition, it is important to understand how much market participants are guided by the National Bank forecasts.

NBU inflation forecasts have not have a pronounced systematic shift in recent years. Thus, in 2023 and the first half of 2024, disinflation shocks were observed, and in the second half of 2024 a powerful pro -inflation shock took place. The displacement of NBU inflation forecasts during this period was minimal and multidirectional. An important characteristic of the NBU forecasts was the correct prediction of trends, in particular the turn of the inflationary trend in 2024.

Forecasting History: Viewing CPI forecasts, % year up to year

Source: NBU calculations

The accuracy of the NBU forecasts for inflation for 2019-2024 was higher than the average level. Among the non -cordant for the predictive horizon of errors of consumer prices index forecasts, the National Bank forecasts were one of the best.

Forecast rating: CPI, annual change at the end of the year, %. Zero values ​​on graphs mean that the errors of a particular organization’s prognosis correspond to the average errors of the forecast of all organizations, positive values ​​- the average errors of the prognosis of a particular organization are greater than the average level of errors of all forecasts, negative – lower. The rating was developed on the basis of the average absolute errors of the forecast (Mae) and their values ​​adjusted to the duration of the forecasting horizon (Adjmae). The names of individual organizations, except the IMF, are impersonal and replaced by O1-O8 (Ministry of Economy, « Meaning Bank » (« Alfa-Bank Ukraine »), ICU, Dragon Capital, Raiffeisen Bank (« Aval »), JP Morgan, « OTP Bank », Goldman. The order of these organizations does not correspond to the numbering.

Source: NBU calculations

NBU forecasts for real GDP in 2024 were mostly more consensive (lower) compared to consensus but close to actual. The 2020 crisis and the Great War led to the expansion of GDP forecasts and, accordingly, their mistakes. Short -term GDP forecasting by traditional methods and models is complicated not only by the fact that economic activity in the country was determined primarily by the course of war, but also by the lack of operational statistics (SCS limited the publication of statistics).

However, the use of alternative approaches with a limited amount of data, supported by the National Bank’s expert estimates, ensured fairly high accuracy of short -term forecasts of economic activity in conditions of unprecedented uncertainty. The National Bank’s GDP forecasts made after the Great War do not contain a noticeable systematic shift in one way, despite a considerable scale of uncertainty and shock.

The history of forecasts: real GDP, % year up to year. The value of real GDP for 2024 is the assessment of the National Bank.

Source: NBU calculations

The accuracy of the NBU forecast for GDP was significantly higher than the average of the forecasts of all covered organizations by adjusted and not adjusted mistakes.

Rating of forecasts: real GDP, % year up to a year

Source: NBU calculations

Therefore, despite the considerable uncertainty, the openness of the CB remains a key element of its independence and success in ensuring macroeconomic stability. In addition, the forecasts and assumptions on which they are based are the opportunity to see the public a picture of the future and form their expectations.

Even under the current conditions, the presence of an unforeseen scenario in the Central Library contributes to trust in the hryvnia and confidence in macroeconomic stability. Moreover, the analysis of the characteristics of the forecasts is carried out regularly.

That is why since 2015 the NBU has not only published a full macroeconomic forecast, in April 2022, and returned to the publication of forecasts in July 2022. Trust, even in war, is the most valuable Central Bank resource. Publication of quality forecasts will continue to remain an important element of its preservation.