inflation projection ofi ff the national bank of poland ... · b tt th t d) n h i ti f 2008better...

Inflation projectionf i fof the National Bank of Polandbased on the ECMOD model

October 2007

Inflation projection – October 20078 8

6

7

8per cent

6

7

8

4

5

4

5

2

3

2

3

1

0

1

1

0

1

-2

-1

04q1 04q3 05q1 05q3 06q1 06q3 07q1 07q3 08q1 08q3 09q1 09q3-2

-1

2

Source: Macroeconomic and Structural Analyses Department

Presentation plan

• Central projection– Starting point compared to the July projection– Projection for 2007-2009– The October projection compared to the July

projectionprojection– Expert adjustments

• Analysis of inflation projection uncertainty– Factors accounted for in the model – fan charts

F d f i h d l– Factors unaccounted for in the model

3

Central projection

4

Starting point of the October projectionas compared to the July projection

GDP d it t• GDP and its components• Labour market• CPI and core inflation

5

GDP and its componentsp

6

Starting point

G fi d i l f iGross fixed capital formation: similar growth rate

GFCF y-o-y (%)

35

25

30 07 Oct07 Jul

20

25

10

15

5

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

7

06 06 07 07 08 08 09 09

Household final consumption: lower growth rate in Q2Household final consumption: lower growth rate in Q2,similar growth rate in Q3

Household final consumption y-o-y (%)

7

6

5

07 Oct

4

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

07 Jul

8

06 06 07 07 08 08 09 09

C ib i f lContribution of net exports: lower

C t ib ti f t t ( )Contribution of net exports y-o-y (pp)

1.5

0.5

07 Oct07 Jul

1 5

-0.5

-2.5

-1.5

-3.5

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

9

06 06 07 07 08 08 09 09

GDP: similar growth rate

GDP y o y (%)GDP y-o-y (%)

8

7

07 Oct

07 Jul

6

5

4

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

10

06 06 07 07 08 08 09 09

Labour market

11

Starting point

Total employment, wages and ULCTotal employment, wages and ULCGross wages y-o-y (%)

10

Total employment BAEL y-o-y (%)

6

07 O t

7

8

9

4

507 Oct

07 Jul

4

5

6

3 3 3 3

07 Oct

07 Jul1

2

3

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

ULC y-o-y (%)

8

• Stronger labour market recovery5

6

7 07 Oct07 Jul

• Higher growth rate in total employment, significantly 2

3

4

12

higher growth of wages and ULC

1

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

Inflation

13

Starting point

Inflation: lower

CPI inflation (%)

4

3

4

2

107 Oct

0

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

07 Jul

14

06 06 07 07 08 08 09 09

Core inflation: lower

Core inflation (%)

4

3

4

2

107 Oct

0

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

07 Jul

15

06 06 07 07 08 08 09 09

Macroeconomic projectionfor 2007-2009for 2007-2009

Constant interest rates

16

Co sta t te est ates

Assumptionsp

17

Macroeconomic projection

Assumptions: external factorsAssumptions: external factors

– More expansionary monetary policy in the euro area and in th U it d St t l i t t t f t th i ththe United States - lower interest rates forecasts than in the July projection:

• in the US - by approx 0 1 pp in 2008 Q1 and approx 0 8in the US by approx. 0.1 pp in 2008 Q1 and approx. 0.8 pp in 2009 Q4

• in the euro area - by approx. 0.1 pp in 2007 Q3 andapprox. 0.4 pp in 2009 Q4)

– In 2008-2009 oil prices higher by approx. 5-6 $/bar as compared to the July projectioncompared to the July projection

– Slightly lower GDP growth in the United States and United Kingdom than assumed a quarter ago, similar GDP growth g q g , grate forecast for the euro area

– No significant changes in the foreign GDP deflator growth f

18

rate forecast

A ti i t l f tAssumptions: internal factors

G th t f f d i hi h th f t i J l– Growth rate of food prices higher than forecast in July -according to experts food prices will grow, on average, by 0 9 pp (y-o-y) faster in the first four quarters of the forecast0.9 pp (y o y) faster in the first four quarters of the forecast that expected in July

– Slightly higher growth of fuel prices in the long-term g y g g p gprojection horizon

– Path of structural and cohesion fund utilisation for 2007 returned to the level assumed in the April projection, which is higher than expected in July (EU fund utilisation data are b tt th t d) N h i ti f 2008better than expected). No change in assumptions for 2008-2009.

19

Food prices y-o-y: higher growth ratein the next three quarters

Food price inflation (%)

5

3

4

1

2

-1

0

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

07 Oct07 Jul

• Decreasing impact of expert-set food prices on inflation (subsiding after 4 quarters)

06Q

06Q

07Q

07Q

08Q

08Q

09Q

09Q

20

• Food price growth rate converges with net inflation growth rate (no sequence of shocks is forecast that would deviate food price inflation from the net inflation)

Fuel prices y-o-y: slightly higher growthFuel prices y o y: slightly higher growthstarting from 2008 Q3

Fuel price inflation (%)

20

1507 Oct07 Jul

5

10

-5

0

-10

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

21

06 06 07 07 08 08 09 09

GDP and its componentsp

22


Gross fixed capital formationGross fixed capital formation

GFCF y-o-y (%)GFCF y o y (%)

3507 Oct

25

3007 Oct07 Jul

15

20

10

15

5

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

23

0 0 0 0 0 0 0 0

H h ld fi l tiHousehold final consumption

Household final consumption y o y (%)Household final consumption y-o-y (%)

8

7

5

6

4 07 Oct07 Jul

3

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

07 Jul

24

0 0 0 0 0 0 0 0

Contribution of net exports

C t ib ti f t t ( )Contribution of net exports y-o-y (pp)

107 Oct

0

07 Oct07 Jul

-1

-2

-3

6Q1

6Q3

7Q1

7Q3

8Q1

8Q3

9Q1

9Q3

25

06 06 07 07 08 08 09 09

GDP

GDP y-o-y (%)

8

66

4

07 Oct

2

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

07 Jul

26

06Q

06Q

07Q

07Q

08Q

08Q

09Q

09Q

Labour market

27


Labour marketGross wages y-o-y (%) Net wages y-o-y (%)

20

7

8

9

10

07 Oct

07 Jul12

16

20

4

5

6

7

0

4

8

07 Oct

07 Jul

4

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

Total employment BAEL y-o-y (%)

8

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

4

6

807 Oct

07 Jul

0

2

4

28

0

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

Labour productivity and ULCLabour productivity and ULCULC y-o-y (%)

807 Oct

Labour productivity y-o-y (%)

6

4

6

07 Oct07 Jul

3

4

5

0

2

1 3 1 3 1 3 1 3

0

1

2

3 3 3 3

07 Oct07 Jul

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

ULC in non-agricultural sectors y-o-y (%)

12

8

10

12

07 Oct07 Jul

2

4

6

29

2

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

Inflation

30


Core inflation y-o-y

Core inflation (%)

5

4

2

3

1

2

07 Oct

0

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

07 Jul

31

0 0 0 0 0 0 0 0

Determinants of y-o-y core inflation (%)

10

7

8

9

10

3

4

5

6

e (%

)

0

1

2

3

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4-o-y

gro

wth

rate

-4

-3

-2

-1

05Q

05Q

2

05Q

3

05Q

4

06Q

06Q

2

06Q

3

06Q

4

07Q

07Q

2

07Q

3

07Q

4

08Q

08Q

2

08Q

3

08Q

4

09Q

09Q

2

09Q

3

09Q

4

Y-

projection

-7

-6

-5

32

Import prices ULC in non-agricultural sectors

CPI inflation

CPI inflation (%)

5

4

2

3

1 07 Oct

07 J l0

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

07 Jul

33

The October projection compared to the J l projectionthe July projection

34


The October projection comparedto the July projection: CPI inflationy p j

• CPI inflation remains below the path of the July projection th h 2008 Q2 I th b t t i fl tithrough 2008 Q2. In the subsequent quarters inflation accelerates: starting from 2008 Q4 it runs approx. 0.2-0.3 pp above the July forecast

• Differences in CPI inflation paths result from:i fl ti i l th i th J l j ti til– core inflation is lower than in the July projection until

2008 Q4, and higher in the subsequent quarters,– in the short term food prices growth rate is higher than in p g g

July projection– in the longer term (starting from 2008 Q3) fuel prices

growth rate is higher

35

growth rate is higher

The October projection compared toThe October projection compared to the July projection: core inflation

• Differences in core inflation paths result from:– 0.5 pp lower core inflation at the starting point of the

projectionprojection– labour market developments: growth rate of ULC in non-

agricultural sectors in 2007 Q2 and Q3 higher on averageb 2 5 th f t tby 2.5 pp than forecast a quarter ago.

• In the short-term horizon of the forecast: lower core inflation path amid a rapid growth in ULCp p g

• In the long-term horizon of the forecast: increasing imbalance between price level and its cost determinants leads to inflation accelerationacceleration

36

Expert adjustmentsp j

37


E t dj t tExpert adjustments• Main areas of adjustments in the October forecasting round:• Main areas of adjustments in the October forecasting round:

– Structure of GDP growth: nature and scope of the adjustments similar to those introduced in the July j yprojection. The structure of GDP growth adjusted in order to strengthen the contribution of internal demand amid the weakening net exports contributionamid the weakening net exports contribution.

– Labour market developments: adjustments necessitated by problems with BAEL (LFS) data credibility and y p ( ) yinterpretation of recently observed labour market phenomena (high profitability of enterprises amid accelerating wage increase and low pass through ofaccelerating wage increase and low pass-through of higher labour costs to prices)

38

Expert adjustmentsExpert adjustments• Main areas of adjustments in the October forecasting round:

• household final consumption,• gross fixed capital formation,

bli i• public consumption, • fiscal sector variables,

t d i t l• export and import volumes,• number of working persons,• wages NAWRU and import prices• wages, NAWRU and import prices

• The following slides present the paths of variables before adjustments (so-called raw projection) and after introducing all expert adjustments to the model (the October projection).

39

Joint effect of the adjustments on inflationJoint effect of the adjustments on inflation and GDP

CPI inflation (%)

5

GDP y-o-y (%)

3

4

7

8Oct_raw

Oct_adjusted

1

2

Oct_raw 5

6

0

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3Oct_adjusted

4

06Q

1

06Q

3

07Q

1

07Q

3

08Q

1

08Q

3

09Q

1

09Q

3

40

Accounting for CPI inflationg

41


Decomposition of the deviation between theDecomposition of the deviation between the October and July inflation path

Decomposition of the deviation betw een October and July inf lation paths

0.2

0.4

-0.2

0.0

pp

-0.6

-0.4

07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q407Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4

Fuel price inf lation Food price inflation Core inf lation

42

Food prices* and fuel prices

Deviation of the October CPI inflation projection as a result of the change in the assumed path of food prices betw een July and

O t b d ( )

Deviation of the October CPI inf lation projection as a result of the change in the assumed path of fuel prices betw een July and

O t b d ( )October round (pp)

0.3

0.4October round (pp)

0.1

0.2

0.1

0.2

0.0

0.0

06Q

1

06Q

2

06Q

3

06Q

4

07Q

1

07Q

2

07Q

3

07Q

4

08Q

1

08Q

2

08Q

3

08Q

4

09Q

1

09Q

2

09Q

3

09Q

4

Change in CPI inf lation

-0.1

06Q

1

06Q

2

06Q

3

06Q

4

07Q

1

07Q

2

07Q

3

07Q

4

08Q

1

08Q

2

08Q

3

08Q

4

09Q

1

09Q

2

09Q

3

09Q

4

Change in CPI inf lation

* Food prices directly affect the CPI in the first four quarters of the projection. In subsequent quarters, food prices affect the CPI indirectly through the relationships holding within the model ( h th i t f CPI i fl ti i fl ti d t i i th ti f

43

(such as the impact of CPI inflation on core inflation and auto-regression in the equation of coreinflation).

Uncertainty factors accounted for in the model Fan chartin the model – Fan chart

44

Uncertainty of projection

Inflation projection – October 2007

8 8

6

7

8per cent

6

7

8

4

5

6

4

5

6

2

3

2

3

1

0

1

1

0

1

-2

-1

04q1 04q3 05q1 05q3 06q1 06q3 07q1 07q3 08q1 08q3 09q1 09q3-2

-1

45


Inflation projection - October 2007(constant interest rates)(constant interest rates)

• The central path indicates that the inflation target levelThe central path indicates that the inflation target level (2.5%) will be breached in 2007 Q4, while in 2009 Q2 CPI inflation will overshoot (by 0.1 pp) the upper tolerance limit for deviations from the inflation target (i etolerance limit for deviations from the inflation target (i.e. 3.5%)

• The fan chart points out to a roughly symmetrical distribution of risk of inflation deviating upwards and downwards from the central path in the projection horizon p p j

46

Overview of probabilities for inflationProbability of inflation running:Probability of inflation running:

below 1.5% below 2.5% below 3.5% below the central path

in the range (1.5%; 3.5%)

0 002 0 421 0 995 0 504 0 9922007 Q4 0.002 0.421 0.995 0.504 0.992

2008 Q1 0.027 0.403 0.915 0.505 0.888

2008 Q2 0.136 0.508 0.866 0.505 0.730Q

2008 Q3 0.102 0.327 0.644 0.504 0.543

2008 Q4 0.096 0.284 0.560 0.500 0.464

2009 Q1 0.092 0.255 0.502 0.501 0.409

2009 Q2 0.094 0.249 0.487 0.502 0.394

2009 Q3 0 094 0 248 0 481 0 503 0 3882009 Q3 0.094 0.248 0.481 0.503 0.388

2009 Q4 0.108 0.267 0.494 0.506 0.386

47

Projection of GDP growth rate – October 2007

11 11

9

10

11 per cent

9

10

11

6

7

8

6

7

8

4

5

6

4

5

6

1

2

3

1

2

3

0

1

04q1 04q3 05q1 05q3 06q1 06q3 07q1 07q3 08q1 08q3 09q1 09q30

1

48


Decomposition of central path uncertainty (decomposition of the fan)( p )

• Throughout the projection: dominant impact on inflation uncertainty is exerted by uncertainty of the paths of food prices, core inflation and oil pricesIn the medi m term: dditi ll th i fl ti• In the medium term: additionally the inflation uncertainty is affected by random component error in the equations of GDP deflator, exchange rate and import q , g pprices

• The fan chart does not account for uncertainty of the model (it is constructed under the assumption of an adequate model)

49

Uncertainty factors unaccounted for in theUncertainty factors unaccounted for in the model (1)

• The scale of the pass-through of labour cost growth to future inflation amid ongoing globalisation:

Lower scale of the pass through of labour costs to prices at enterprises– Lower scale of the pass-through of labour costs to prices at enterprises – Increased possibilities of reducing non-wage production costs

• Uncertainty of BAEL (LFS) data– Probable overestimation of the growth rate in the number of working

persons• Labour market developments: p

– The scale of the transmission of the economic recovery on the rise in effective supply of labour, i.e. the number of economically active persons and the NAWRUpe so s a d t e N W U

50


• Labour market developments (contd.):– The scale of wage pressure weakening resulting from

d d tiwage wedge reduction– Intensity and nature of migration flows– The impact on the labour market exerted by the alreadyThe impact on the labour market exerted by the already

implemented or probable changes in fiscal and regulatory policies (minimum wage, extended period of granting early retirement reinstatement of the Alimony Fund)early retirement, reinstatement of the Alimony Fund)

• External demand and inflation:– Increased risk connected with slowdown in the world

economy which could potentially translate into lower than currently observed paths of GDP and inflation in

51

than currently observed paths of GDP and inflation in Poland


• External demand and inflation (contd ):• External demand and inflation (contd.):– The risk of reduced propensity to invest in Poland and other countries in the

region due to the heightened global uncertainty in financial markets

• Uncertainty about the condition of the public finance sector– Persisting uncertainty connected with the fiscal policy direction after the

recent parliamentary electionrecent parliamentary election – The uncertainty about the condition of general government sector should

also be considered against the background of the developments in the world economy and the domestic labour marketeconomy and the domestic labour market

– A possible economic growth deceleration resulting from disruptions in international financial markets would be conducive to worsening the amount of deficit and debt of the public finance sector in relation to GDP (there would be an increased risk of weakening the confidence of both domestic and foreign investors and exchange rate depreciation)

52

Uncertainty factors unaccounted for in the ymodel (4)

• Exchange rate path:– Uncertainty connected with the exchange rate forecast increased after

the last projection owing to the disruptions in international financial markets

• Data released after the cut-off date– Data and forecasts released after the cut-off date suggest the possibility

f il i hiki b h l l d f i h j iof oil price hiking above the level accounted for in the projection– Data on inflation in September suggest a stronger food price growth in

the horizon of the next few quarters than it was accounted for in the current projectioncurrent projection

– The latest data point to the possibility of a stronger appreciation of the euro against the US dollar than it was accounted for in the projectionAccounting for the revision of the National Accounts and the actual– Accounting for the revision of the National Accounts and the actual monthly data for September (data on the construction and assembly output and retail sales) slightly increases the risk of a lower than forecast GDP growth rate in the short-term horizon of the projection

53

g p j

The balance of all risk factors for the projection can be assessed asprojection can be assessed as

symmetrical in the short-term projection horizon while in the longerprojection horizon, while in the longer

horizon it is slightly more probable that inflation will run below the path from the

projection than above itp j

54

inflation projection ofi ff the national bank of poland ... · b tt th t d) n h i ti f 2008better...

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