The Czech National Bank (CNB) resumed the publication of a numerical exchange rate forecast in the form of a fan chart in a move that it said was part of the normalisation of its monetary policy.
This re-establishes an extraordinary level of forecast transparency which was temporarily curtailed in late 2013 as a result of an out-of-the-box policy decision. Now the Czech central bank returns to the practice launched in 2009 when it became the world's only central bank to publish forecasts for the nominal exchange rate against a specific currency in numerical form.
As heralded in my January Q&A with Jan Filáček, my former colleague and Deputy Director of Monetary Policy and Fiscal Analyses Division at the CNB’s Monetary Policy Department, a smooth exchange rate forecast re-launch had been foreseen by Czech central bankers.
In a box included in this year’s first Inflation Report and titled “Return to the publication of numerical exchange rate forecasts” , the CNB wrote:
Although the exchange rate forecast may not materialise, it gives market participants a guide to the future monetary policy stance.
With knowledge of the exchange rate that the central bank uses in its forecasts, they can better assess how new information affects the balance of risks to the forecast. As a result, they can better understand the Bank Board’s decisions. For example, if the exchange rate is appreciating faster than forecasted but the prediction is materialising in all other respects, it is likely that the central bank will compensate for the greater tightening of the monetary conditions via the exchange rate by tightening policy less via interest rates. If the markets take this into account, their expectations of future interest rate growth will be lowered, which in turn will lessen the rate of appreciation. Therefore, publication of the exchange rate forecast by the central bank has a stabilising effect. This is ultimately beneficial to the whole economy.
The Czech experience of gradually increasing, and in the case of the exchange rate forecast even temporarily decreasing, forecast transparency offers plenty of food for thought to central bankers from low income and other developing countries that are modernizing their monetary policy frameworks.