NBP got it right when predicting inflation. Although his projections didn't always come true
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President Adam Glapiński's economists were right
Just a few days earlier, the National Bank of Poland presented a new macroeconomic projection. Then its content may have seemed unrealistic. NBP economists predicted that in 2025 CPI inflation would drop to 3.5%. This would mean a return to the upper limit of the range of deviations from the NBP target (2.5% +/- 1 percentage point). The projection predicted that in 2023 inflation would reach 11.9%, and in 2024 it was to be 5.7%.
The March 2023 projection turned out to be accurate. In 2023 and 2024, the average inflation turned out to be even lower than the projection and amounted to 11.4%, respectively. and 3.6 percent In 2025 it will probably be 3.7%, which is slightly above the projection, but in the fourth quarter of 2025 it may be much lower, around 2.5-2.6%. (in October alone it was 2.8%). According to the March 2023 projection, inflation in the last three months of 2025 was to be 3.1%.
An important caveat that we will mention later in the text: The NBP forecast of March 2023 was prepared assuming that the reference rate will be 6.75% throughout the forecast horizon.. Today, thanks to two cuts in the fall of 2023 and five in 2025, it is 2.5 percentage points lower. lower and amounts to 4.25 percent.
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Central Statistical Office, National Bank of Poland, own study
In turn, market experts in the NBP macroeconomic survey (AM NBP) in March 2023 indicated that the average inflation in 2023 would amount to 12.5%, in 2024 it would drop to 6.9%, and in 2025 to 4.5%. The central path of AM NBP forecasts was more pessimistic than the NBP projection and further from the actual readings.
The NBP itself, preparing the results of the macroeconomic survey, pointed out that it is worth focusing on the distribution of probabilities. The central inflation forecast is higher than the forecasts that can be assigned the highest probability. In particular, based on the histograms, it can be concluded that for 2024 the most probable values are in the range of 5.5-6.5%, and for 2025 in the range of 2.5-4.5%. In this light, the survey results look good.
It is worth emphasizing, however, that the target inflation appeared for the first time slightly earlier in the NBP projection, in the famous report from November 2022. Then the central bank unexpectedly extended the projection horizon (usually done in March) and then it appeared for the first time in 2025. This “trick” allowed inflation to be shown within the target range.
Differences between the projection and the NBP macroeconomic survey
NBP macroeconomic projections are prepared by the Department of Economic Analysis and Research using the NECMOD model. It allows you to simulate how hundreds of variables (from currency rates, through raw material prices, to consumer demand) influence each other. Thanks to this, NBP sees the “bigger picture”. The key feature – important for proper understanding of the accuracy of these forecasts in the period of changes in monetary policy – is the assumption of constant NBP interest rates throughout the projection horizon. For example, the latest one, presented at the beginning of November, was prepared on the assumption that the reference rate would still be 4.50%. (only on November 5, the Monetary Policy Council decided to cut it to 4.25%).
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NBP
This assumption means that the NBP projection is not “the best forecast of what will happen”, but rather a simulation of the development of the economy in a scenario in which the Monetary Policy Council does not change the cost of money. Therefore, at times of high inflation pressure (e.g. in 2021–2022), NBP projections naturally indicated higher inflation and GDP paths than market forecasts (they did not take into account the inhibiting impact of future rate increases expected by the market).
See also: Poles believed that the fight against inflation had been won. They put their money on it
The nature of AM NBP is slightly different. It is created by economists from commercial banks, analytical and research centers and employers' organizations. Unlike the NBP projections, these forecasts are unconditional: the surveyed experts take into account not only the expected changes in rates, but also, among others, the government's future fiscal plans, even those that have not yet been formally adopted but only announced. For this reason, the results of the NBP projection and the NBP AM forecasts will naturally differ.
The year 2023 was exceptional, the decline in inflation was expected
— NBP undoubtedly has the greatest access to information and the most extensive analytical tools. Its resources allow it to analyze in great detail individual factors affecting the rate of inflation and GDP dynamics – says Monika Kurtek, chief economist at Bank Pocztowy.
It reminds us that 2023 was a special year. — This was the first full year after Russia attacked Ukraine, inflation after supply shocks reached multi-year peaks in February and in a sense it was known that it would start to decline, the trend was clear. Supply shocks were subsiding, and government decisions to freeze some prices also had an impact on inflation, he notes.
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Central Statistical Office, National Bank of Poland, own study
He adds that NBP projections were not always 100% accurate. An example may be the too high inflation forecast presented in recent quarters, which the central bank justified with increases in energy prices (the March 2025 projection suggested that inflation in the fourth quarter would amount to as much as 4.8%. year to year). There were also deviations in GDP dynamics.
— In my opinion, the latest projection underestimates the slowdown in inflation in the fourth quarter of 2025 and throughout 2026. At the same time, GDP growth may be higher than forecast by the National Bank of Poland, and may reach up to 4% in 2026. – says Monika Kurtek. According to the National Bank of Poland, inflation in Poland in 2026 will amount to an average annual rate of 2.9 percent, and economic growth is expected to reach 3.7 percent.
See also: “The MPC has plenty of time to pull the trigger many times.” Important forecasts for borrowers
— However, we must bear in mind that a model, even if advanced, is still just a model. It is unable to take into account factors that are generally difficult to predictsuch as government decisions that have a particular impact on inflation. They are often announced with a short deadline before they enter into force, and the horizon of inflation and GDP in NBP projections is relatively long. Expert corrections are also difficult to make in such conditions. In addition, there are external factors, such as decisions made by, for example, President Donald Trump, which are difficult to predict, and things may happen that affect, for example, oil prices. All decisions regarding the war in Ukraine also have many unpredictable consequences, explains the chief economist of Bank Pocztowy.
The NBP did not always get its forecasts right
In March 2019, long before the pandemic, but at a time of increased wage pressure, the NBP central projection indicated that CPI inflation in Poland would amount to 1.7% throughout 2019, the same result expected by experts at the NBP AM. Both forecasts underestimated the pace of price growth, because throughout the year inflation amounted to 2.3%. It was similar with GDP dynamics: the projection indicated an increase of 4.0 percent, the survey indicated 4.1 percent, but in reality it was 4.7 percent.
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Central Statistical Office, National Bank of Poland, own study
Due to the pandemic, 2020 was extremely unpredictable, so we will not provide forecasts from this period. 2021 was an interesting year, a time when the narrative of “temporary inflation” collided with brutal reality. (this applies to many developed countries, including the euro zone and the USA). This was the period of the greatest discrepancy between forecasts and implementation.
The beginning of the year in the NBP projections was still marked by faith in stable inflation. In March, the National Bank of Poland maintained that inflation throughout 2021 would amount to 3.1%. and in 2022 it will drop to 2.8%. This was argued by the “persistent negative output gap” and “higher level of unemployment”, which were supposed to limit wage pressure. In the July projection, inflation expectations were raised to 4.2%. and 3.3 percent The increase in fuel and food prices was pointed out, emphasizing that this was due to external factors independent of monetary policy.
Only in November 2021 (after the first rate increase in years) did the projection show an increase in inflation to 4.9%. in 2021 and 5.8 percent in 2022 It was a breakthrough moment in which The NBP had to recognize that inflation is not a temporary phenomenon, but a persistent trend. He responded to this with one of the most dynamic cycles of rate increases in history (in 2021-2022, the reference rate increased from 0.1% to 6.75%).
The analytical market began to price inflation risks faster, but market experts also underestimated the scale of the increase in consumer prices. In the March AM NBP round, the central scenario indicated 3.4%. inflation in 2021 and 2.9 percent in 2022 (0.3 percentage points and 0.1 percentage points, respectively) more than the NBP forecast. History has shown that inflation in 2021 amounted to 5.1%, and in 2022 it accelerated to as much as 14.4%.
The NBP AM results were quicker to point to an increased risk of second-round effects, i.e. the transfer of high wage and energy costs to employees' wage demands and, consequently, to retail prices. While the NECMOD model responded “mechanically” to input data at a fixed interest rate, bank analysts could adjust their models more flexibly, seeing, among other things, wage pressure in companies and supply constraints in terms of goods or rising energy prices.
The increase in energy prices in 2022 made forecasting difficult
Russia's aggression against Ukraine in February 2022 disrupted the relative economic balance (although deferred demand after the pandemic was already driving up inflation in 2021), which was caused by a sharp increase in energy carriers: oil, fuels, gas, coal, etc. Forecasting in this period became extremely difficult. Therefore, we will not provide detailed forecasts here. We will limit ourselves to pointing out that in March 2022, the NBP projection – which emphasized the “macroeconomic effects of armed aggression” – indicated that the CPI index would amount to 10.8% in 2022 and 2023, respectively. and 9 percent
Interestingly, the NBP AM results from that time were 9.8%. and 7.6 percent for 2022 and 2023, which means that NBP economists were closer (despite ongoing interest rate increases) because the CPI was 14.4%, respectively. and 11.4 percent
The extremely fast and unpredictable increase in energy prices was accompanied by a very visible strengthening of the dollar; the Polish zloty was the weakest against the American currency in decades, which meant that inflation was also “imported” (purchases of goods denominated in dollars became more expensive for us). This was another reason why economists – those from the National Bank of Poland and banks – underestimated the increase in inflation in 2022.
Author: Maciej Rudke, journalist of Business Insider Polska
