Further, the invasion is having a negative impact on the global supply chains for certain productive processes, with signs of a worsening of bottlenecks, after the partial improvement in the fourth quarter of 2021, although the lockdowns in China to check the pandemic may also have contributed to this. In any event, the latest indicators of export orders point to a slowdown in trade flows. Amid so much uncertainty, preparing macroeconomic projections is even more complicated than usual. The Banco de España’s latest forecasts,1 published on 5 April, confirm that the gradual recovery in activity has been blown off course by the invasion of Ukraine: GDP growth has been revised down and inflation up, compared with the previous projection exercise in December 2021. These projections were prepared on the basis of still-incomplete information for the first quarter of the current year. According to the data available, the recovery in activity continued in the period leading up to the war. This is reflected, for example, in the information on social security registrations, despite the effects of the spread of the Omicron variant of COVID-19, probably due to the beneficial effects of the high rate of vaccination. However, the same social security registrations data also show that employment growth had already begun to falter in March and early April, following the invasion of Ukraine. Through the above-mentioned channels, the war has led the output growth projections for 2022 and 2023 to be revised downwards by 0.9 pp (to 4.5%) and 1 pp (to 2.9%), respectively.

Reference is made in particular to Archer, D. (2005): “Central-bank communication and the publication of interest rate projections”, Faust, J. and E. Leeper (2005): “Forecasts and inflation reports: An evaluation”, Svensson, L.E.O. (2005): ”Further Developments of Inflation Targeting" and Woodford, M. (2005): “Central-Bank Communication and Policy Effectiveness". 3  This is further discussed by Woodford, M. (2005): “Central-Bank Communication and Policy Effectiveness", see footnote 2. BIS Review 6/2006  3  If the Bank’s interest rate forecast is different from market expectations, then this is useful information, not only for market participants, but also for the central bank. This may indicate that the central bank and market participants have a differing perception of future economic developments. It may also reflect differing views concerning the trade-offs in monetary policy. Market expectations, as reflected in forward rates, will be a way of cross-checking the Bank’s interest rate forecast. If Norges Bank’s interest rate forecast deviates from market expectations, the Bank should be able to explain this satisfactorily in order to influence interest rates in the money market. In Inflation Report 3/05, there were only minor differences between Norges Bank’s interest rate path and calculated forward rates up to 2007. Forward rates indicated that interest rates would then level off, while our forecast indicated a continued gradual rise up towards a more normal level. After the publication of the Report and up to end-January, market expectations have fallen. This shows that the interest rate path envisaged by the Bank and the path expected by the market can differ.