Predicting Geopolitical Shocks with Pharmacy Precision is Difficult, but We Have a Shelf of 'Plan B's' – Deputy Head of the NBU

In an interview with Interfax-Ukraine, Vladimir Lepushinsky, the Deputy Head of the National Bank of Ukraine (NBU), discussed the complexities of predicting macroeconomic indicators in the context of ongoing geopolitical instability. He emphasized that the NBU refrains from providing interim assessments of macroeconomic indicators between inflation reports, as accurate evaluations require reliable information. Referring to the statement made by Minister of Economy Oleksiy Sobolev regarding a 1.2% decline in the economy during January-February, Lepushinsky highlighted that the NBU holds a different perspective on the situation.

According to Lepushinsky, while the Ukrainian economy has indeed suffered, consumer demand has remained sufficiently resilient, helping to stabilize the situation. He noted that despite the ongoing shelling and energy deficits negatively impacting the industrial sector, the final GDP figure will depend on the dynamics of other industries.

Lepushinsky explained that the NBU publishes forecasts quarterly and conducts analyses of actual data and risk assessments in between. He referenced a March briefing where the NBU warned of a potential increase in inflation in the coming months. While inflation stood at 7.6% in February, it is expected to remain at approximately the same level in March, contrary to earlier predictions that it would decrease to 7%.

This forecasting approach, according to Lepushinsky, is widely accepted among central banks that target inflation, such as the Bank of England, the Czech National Bank, the Swedish Riksbank, and the European Central Bank. All of these institutions also make quarterly forecasts and assess risks in between to avoid information noise.

Lepushinsky also commented on changes in the NBU's macroeconomic forecast, which were related to strikes on infrastructure and an increase in the assessment of energy deficits from 3% to 6%. He noted that the electricity deficit in January turned out to be somewhat lower than expected; however, the situation remained complicated due to the destruction of energy infrastructure and low temperatures.

Since mid-February, Lepushinsky stated that the situation in the energy sector has begun to improve, thanks to additional generation from renewable sources and a warming trend. In March, the business activity expectations index finally moved into positive territory, which is a good sign for the economy.

When asked about the impact of energy deficits on inflation and the currency market, Lepushinsky replied that it has had a partial effect on inflation. Specifically, mobile communication tariffs increased by 15% in January-February, reflecting higher business costs. The contribution of this factor to annual inflation was 0.25 percentage points. However, the NBU does not expect that the impact of deficits will be significant moving forward, as they have divergent effects on inflation.

Lepushinsky also noted that the impact of energy deficits on the currency market has been moderate. Production and exports of metallurgical, mining, and chemical products have declined, while imports of energy resources have surged to record levels. Nevertheless, the situation stabilized in March, and gas reserves in storage are reducing the need for imports.

The Deputy Head of the NBU also addressed the risks associated with potential new strikes on the energy system. He pointed out that, despite the negative impact of energy deficits on GDP, energy experts believe that Ukraine will be better prepared for the next winter than it was for the current one.

Lepushinsky emphasized that attacks on the energy system affect the economy through several channels, including suppressing business activity and adding pressure on prices. He also noted that Ukraine has already experienced the consequences of such attacks in the past and expressed hope for more favorable scenarios in the future.

Highlighting the importance of the security situation for the economy, Lepushinsky noted that the NBU pays close attention to air attacks and cargo volumes in ports in its reports, as these factors significantly influence the economic situation in the country.