Publication of a numerical exchange rate forecast
Starting from the first forecast in 2009, the CNB will publish a numerical forecast for the koruna-euro exchange rate in the form of a fan chart. This box explains the reasons for this step, pointing out the conditional nature of the exchange rate forecast and briefly recapitulating the methodology used to construct the fan charts.
Up to now, the exchange rate forecast has been presented in the Inflation Reports by verbal description only, as was the case with the interest rate forecast until the start of 2008. The positive experience with the publication of a numerical interest rate forecast in the form of fan charts led to a decision to publish the exchange rate forecast in the same form. Publication of the exchange rate forecast will thus allow users of CNB forecasts to obtain complete information about the expected evolution of domestic economic variables, to assess the internal consistency of the entire macroeconomic outlook and to get a picture of the balance of risks associated with this forecast with regard to the exchange rate. This step will make the CNB the only central bank in the world to publish a forecast for a nominal exchange rate vis-à-vis a specific currency (although a handful of the most advanced inflation-targeting central banks do currently publish effective exchange rate forecasts). The CNB will thus maximize its communication openness and monetary policy transparency.
However, as was emphasised in the case of the interest rate forecast, it is vital that all users of CNB forecasts are aware that the published exchange rate forecast is conditional on assumptions and should in no way be interpreted as a commitment of the central bank to affect the exchange rate or as the exchange rate trend that it prefers. The exchange rate outlook must be understood as a description of the most likely evolution of the exchange rate going forward subject to the assumptions of the CNB macroeconomic forecast and the information available at the time it was drawn up. New information that comes in after the forecast is drawn up can change the exchange rate outlook. This includes movements in domestic interest rates that differ from the forecast, for example based on how the Bank Board assesses the balance of risks associated with this forecast. What is more, the exchange rate is subject to significant deviations, more so than the other forecasted variables, so its values can differ significantly from the forecasted ones.
Since 2008, the CNB has been using fan charts to illustrate the general uncertainty of the forecasts published for headline inflation, monetary-policy relevant inflation, the interest rate path and GDP growth. Starting from this Inflation Report, the same will apply to the published exchange rate outlook. The construction and interpretation of fan charts was described in detail in Box 2 of the I/2008 Inflation Report. The central line in the fan chart represents the path of the depicted variable that is consistent with the baseline scenario of the forecast. The bands distributed symmetrically around this central line illustrate the general uncertainty surrounding the forecast. The successively lighter bands represent widening confidence intervals of 30%, 50%, 70% and 90%. The widths of the confidence intervals for each variable are derived from the errors of previous forecasts and are updated annually to coincide with the first Inflation Report of the year.
In addition to the fan charts illustrating the general uncertainty of the forecasts for key variables, including the exchange rate, CNB forecast users can make use of alternative scenarios, minutes of the CNB board meetings or public statements made by its members to assess specific uncertainties, identify the overall balance of risks associated with the forecast and better understand the Bank Board’s monetary policy decisions.