MONETARY POLICY REPORT | SPRING 2025 (appendix 2)
(authors: Tatiana Keseliová, Tomáš Pokorný, Tomáš Šestořád)
Reviewing the fulfilment of past forecasts is part of the CNB’s forecasting and analytical system. This provides feedback on the use of the g3+ core forecasting model, which is the basic unifying element used in preparing the CNB’s macroeconomic forecasts. The conclusions of these analyses are used to verify the model’s current settings and to consider potential adjustments to them. This is also the case for the extended g3+ model, which will be the CNB’s core forecasting model from this MPR onwards.[1]
The CNB’s macroeconomic forecast serves as an important guide for the Bank Board when setting interest rates. The unifying element used to create the forecast is the g3+ core forecasting model. The forecast predicts the most probable future evolution of the domestic economy and the domestic interest rate path consistent with this which ensures the achievement of the CNB’s inflation target at the monetary policy horizon.
In this appendix, we first compare the CNB’s 2023 forecasts with the outputs of other analytical institutions. We then assess the fulfilment of the CNB’s 2023 forecasts, starting with a comparison of their assumptions at the time (the exogenous inputs of the forecast) and the observed developments. We then compare the forecasted paths of the main domestic variables with the data observed now. The final passage is devoted to a hypothetical model simulation. It shows roughly what the forecast in the Autumn 2023 MPR would have looked like had the subsequently observed, but then unknown, future paths of all the assumptions entering the forecast been known at the time it was prepared.
The 2023 forecasts compared to other institutions
This first section compares the CNB’s 2023 forecasts with other analytical institutions’ contemporaneous outputs.[2] Chart 1 compares the CNB’s forecasts for the full-year data of the main variables under review with the average forecasts of the other institutions and the subsequently observed outcomes for 2023 and 2024.
In 2023, the Czech economy continued to suffer from exceptionally high, albeit easing, inflation, accompanied by economic stagnation linked with the previous tightening of monetary policy at home and abroad. The purchasing power of households fell owing to lower nominal wage growth compared to inflation. However, the CNB’s autumn and winter forecasts for inflation in 2023 were closer to what transpired than the average for the other institutions. In the case of GDP and wages, conversely, the CNB’s autumn and winter forecasts were less accurate, as they assumed that the tighter monetary policy would have larger impacts, as was also indicated by the CZSO data at the time[3] (see Chart 1, line 1). By contrast, the spring forecast underestimated the depth of the economic downturn associated with the above-average high saving rate of households in an environment of global uncertainty, and with the problems in the industrial sectors of the Czech Republic’s main trading partners, especially Germany. This inaccuracy was also consistently reflected in higher inflation and wage forecasts compared to the data observed later. The spring forecast was significantly less accurate than the average for the other institutions, and the summer forecast was almost equally accurate.
The CNB’s spring and summer forecasts for GDP and wage growth in 2024 were not very accurate, although both the GDP and wage growth forecasts were comparably accurate to the average forecasts of the other analytical institutions (see Chart 1, line 2). GDP growth fell far behind expectations and the CNB’s forecast did not correspond to the outcomes until the autumn 2023 forecast, while the other institutions remained too optimistic even towards the end of the year.[4] The saving rate also stayed at unusually high levels in 2024, and the decline in the industrial sectors of the Czech Republic’s main trading partners continued. This was not anticipated by the winter, spring or summer forecast. Similarly, the spring and summer wage growth forecasts were also over-optimistic, while the other institutions systematically underestimated wage growth in 2024 on average. In 2024, inflation returned close to the inflation target and fluctuated in the upper half of the tolerance band. The slightly positive deviation of inflation from the target was driven mainly by above-average growth in administered prices caused by an increase in the administered component of energy prices. Unlike the CNB, the other institutions systematically overestimated inflation in 2024.
To sum up, the CNB’s forecasts for 2023 were of similar quality to those of the other analytical institutions. By contrast, the CNB’s forecasts for 2024 were more accurate.
Chart 1 – Comparison of the CNB’s 2023 forecasts with those of other institutions (full-year data for 2023 and 2024)
Example: the blue CNB dot corresponding to “Spring 2023” in the “GDP for 2023“ chart shows the full-year GDP growth estimate for 2023 from the forecast published in spring 2023 (i.e. the Spring 2023 MPR).
Assessment of the fulfilment of the 2023 forecasts – assumptions
The input assumptions of the CNB’s macroeconomic forecast are industrial producer prices in the effective euro area (broken down into their core and energy components), foreign economic activity (the GDP trend and the output gap), the USD/EUR cross rate and the 3M EURIBOR interest rate and its shadow component capturing the ECB’s unconventional monetary policy measures (asset purchases); see Chart 2. The domestic assumptions include the outlook for administered prices and nominal government consumption along with its deflator and the fiscal impulse.
Chart 2 – Selected forecast assumptions
Compared to the assumptions of the 2023 forecasts, the observed developments in the external environment had a largely anti-inflationary effect, because – from the point of view of inflation – foreign industrial producer prices saw a larger correction. This was reflected in external consumer price inflation, which fell to normal levels faster. This was also partly due to tighter monetary policy of the ECB, whose rates were higher than in the winter and spring forecasts. Conversely, the summer and autumn forecasts had assumed that the ECB would start the rate-cutting cycle somewhat later than it ultimately decided, as they had expected a stronger and faster rebound in economic activity. The latter was weaker than in all the 2023 forecasts. The strength of the effects of the unprecedentedly high energy prices on the industrial sectors of our main trading partners (especially Germany) came as a surprise for the 2023 forecasts, prompting the CNB to reflect on its forecasting system and to revise the external relationships involving energy prices.[5]
The domestic assumptions of the forecasts under assessment turned out to be off the mark mainly because of a more inflationary effect of fiscal policy last year. In the course of 2023, the forecasts progressively reduced the government expenditure outlook for 2024 as the effects of the announced consolidation measures were revised, either with a direct impact on general government consumption or through the fiscal impulse. The autumn 2023 forecast was the furthest off the mark, as it had expected growth in nominal general government consumption to slow noticeably and GDP growth to be additionally dampened through the fiscal impulse. In reality, the consolidation of public budgets was much more moderate. The pace of growth in nominal general government consumption slowed only slightly, and the impact of the negative fiscal impulse on economic growth was less than half compared to the autumn 2023 forecast assumption.
In addition, administered price inflation in early 2024 did not fall to the extent expected in 2023. At that time, the administered component of energy prices became more expensive due to the abolition of government energy distribution subsidies and the reintroduction of fees for renewable sources. The extent of the administrative changes was not known until autumn 2023, so the previous forecasts could not have taken them into account. By contrast, a faster correction of energy prices on commodity exchanges contributed – via a cheaper commodity component of energy prices – to administered prices not rising even more sharply.
Assessment of the fulfilment of the 2023 forecasts – key domestic variables
The deviations of the forecasts from the observed values were due mainly to weaker-than-assumed foreign economic activity, reflected in lower exports and gross fixed capital formation. At the same time, observed economic growth was lower relative to the forecasts under assessment, also due to household consumption. This reflected unfavourable consumer sentiment. Despite renewed growth in real income, households increased their consumption expenditure only gradually from the start of 2024 onwards. This was also reflected in a surprisingly high saving rate. These effects were partly offset by persistently higher-than-assumed growth in general government consumption.
Chart 3 – Forecasts of key domestic variables
Consumer price inflation declined from initial double figures in 2023 in the context of a receding wave of inflation caused mainly by the previous overloading of global production chains and soaring energy prices. Price stability was subsequently restored at the start of 2024 and annual inflation reached exactly 2%. In the second half of 2023 and early 2024, however, inflation fell at a faster rate than the forecasts under assessment had foreseen. This was due to surprisingly low food price inflation. Leaving interest rates higher for longer also helped to return inflation to the target more quickly. Inflation has been in the upper half of the tolerance band since 2024 Q2, at levels slightly higher than the 2023 forecasts. This is due to a marked year-on-year weakening of the koruna against the euro, as well as higher administered prices and only gradually slowing general government consumption growth.
The winter 2023 forecast indicated a need for a further temporary increase in interest rates followed by a gradual reduction. However, the Bank Board decided to leave rates higher for longer. The subsequent forecasts identified a need to gradually ease monetary policy in a context of receding inflation pressures from the external environment over the monetary policy horizon.[6] In reality, interest rates remained unchanged for most of 2023, reflecting the Bank Board’s determination to anchor inflation expectations firmly to the 2% target. Therefore, the rate-cutting cycle was not started until December 2023. Subsequently, interest rates continued to decline over the course of 2024, approaching the 2023 forecast levels in mid-2024.
The forecasts under assessment successfully predicted that the koruna would weaken over the outlook due to a narrowing interest rate differential vis-à-vis euro area rates. However, they underestimated the degree of depreciation. The winter forecast underestimated both the initial appreciation of the koruna in the first half of 2023, which was caused by unexpectedly favourable foreign trade in goods and services, and its subsequent depreciation. The subsequent forecasts, in which the pass-through of the narrowing interest rate differential vis-à-vis euro rates into the exchange rate was reduced based on expert judgement, also underestimated the degree of weakening of the koruna in 2023 and early 2024. With the benefit of hindsight, therefore, these interventions fostering a stronger koruna seem excessive. Since the start of 2024, the exchange rate has been close to CZK 25 to the euro (weaker than in the forecasts under assessment), partly due to growing global uncertainty.
Hypothetical Autumn 2023 MPR forecast incorporating knowledge of the actual evolution of the assumptions
Comparing the hypothetical factors-known simulation with the Autumn 2023 MPR forecast, headline inflation is slightly below the original forecast for most of the period under review (see Chart 4). The difference is due to a faster correction of industrial producer prices abroad and weaker demand from selected trading partners. However, this effect is partly offset by higher administered price inflation and the inflationary effect of faster growth in nominal general government consumption. The central bank reacts to the outlook for persistently higher growth in general government consumption by cutting interest rates more gradually so that inflation returns to the 2% target at the end of the period under review in the hypothetical simulation, while the weaker external demand leads to easier monetary conditions in the exchange rate components. The higher predicted GDP growth in the hypothetical factors-known simulation is due to a less significant consolidation of public budgets. By contrast, weaker economic output abroad leads to lower demand for domestic exports. However, this is not reflected in a commensurate reduction of the investment forecast.[7]
Comparing the hypothetical factors-known simulation with the historical outcome, observed inflation differed significantly only at the start of this year, when there was an unexpectedly rapid increase in food prices while core inflation remained slightly elevated. The fact that the difference in consumer price inflation is minimal throughout 2024 reflects similar overall monetary conditions, but the effects of their components differ (see Chart 4). In reality, nominal interest rates stayed higher for longer to stamp out the remaining pockets of inflation and to anchor inflation expectations. Conversely, the observed exchange rate of the koruna was weaker on average due to the lower economic output of European countries, which was also relatively weak compared to the USA, making the dollar more attractive than the euro. Domestic economic growth was below the hypothetical forecast over the entire period under review, due mainly to lower consumer appetite, which reflected slowly improving but still fragile household sentiment.
A factors-known simulation is a conditional simulation of the g3+ model representing a hypothetical version of the forecast incorporating knowledge of the actual evolution of the exogenous factors (assumptions) of the forecast. The simulation reflects the observed data (the ex-post known paths of the foreign environment, administered prices and government consumption). It thus tells us what the hypothetical forecast would have looked like if the observed evolution of its assumptions had been used in its preparation. However, the simulation is not a fully fledged forecast, as it does not contain additional expert adjustments.
Overall, the factors-known simulation is closer to the historical outcomes than in the autumn 2023 forecast. At the same time, however, the hypothetical simulation reveals some imperfections in the use of new information in the forecast. These have partly been taken into account in the aforementioned model modifications.
Chart 4 – Comparison of the forecast and the factors-known simulation (hypothetical forecast) in the Autumn 2023 MPR with the observed outcomes
[1] The extended g3+ core forecasting model was described in more detail in an appendix to the Winter 2025 MPR.
[2] The data sources are the CNB’s forecasts and the Ministry of Finance (MoF) survey published in the 2023 Macroeconomic Forecast of the Czech Republic. The MoF survey is based on the publicly available forecasts of 11 institutions, seven of them domestic (CNB, Czech Banking Association, MLSA and domestic commercial banks) and the others foreign (e.g. European Commission, OECD, IMF). For the purposes of this document, the CNB’s forecasts are excluded from the survey and the MoF’s forecasts are included.
[3] The winter and autumn GDP forecasts were almost in line with the CZSO’s flash estimate and the data at the time, which the forecasts anticipated during the year. The CZSO revised this data upwards in a later revision.
[4] The GDP and wage growth forecasts for 2024 can only be compared with the CZSO’s flash estimate for now. The upper line in Chart 1 shows that these flash estimates are usually revised later on.
[5] See the appendix to the Winter 2024 MPR, which presented the updated g3+ core forecasting model.
[6] The monetary policy horizon is the future time period which the CNB focuses on when making its monetary policy decisions and which reflects the lag in the transmission of monetary policy. By concentrating on inflation at this horizon, the central bank also abstracts from short-term inflation shocks, whose impact monetary policy can control to only a minimal extent.
[7] In the model used to prepare the forecast under review, investment was linked to potential growth, which was revised only slightly downwards compared to the assumptions of the autumn 2023 forecast, while the cyclical position of our trading partners deteriorated markedly faster than the forecast under review. This minor shortcoming of the effect of external demand on investment was therefore eliminated during the switch to the updated core forecasting model in spring 2024; since then, domestic investment activity has been linked to the foreign output gap.