Risks to the inflation forecast

4th Situation Report 2023

In June, the CNB stopped publishing the Graph of Risks to the Inflation Projection (GRIP), which it has replaced with a textual description of the risks and uncertainties perceived by the Monetary Department’s economists. The reason for this change is the limited comprehensibility of the graph and the relatively low number of experts using it. The textual description of the risks offers similar information value to the target audience without giving the impression that the estimated effect of new information on the inflation and interest rate forecasts is of high accuracy.

Overall, the CNB’s spring macroeconomic forecast is materialising relatively well so far, especially taking into account the uncertain environment in which it was prepared. Neither the new outlooks for foreign and domestic economic variables, nor the changes in the expected economic policy settings in the Czech Republic and the euro area cast any doubt on the fulfilment of the CNB’s 2% inflation target next year, assuming the current monetary policy stance is maintained.

Overall, according to the Monetary Department, the newly available information obtained since the spring forecast was prepared implies only slightly higher headline inflation at the monetary policy horizon and a slightly later decline in market interest rates than in the spring forecast. The strongest upward pressure on the path of domestic rates is created by the new outlook for the external environment. The updated outlook for domestic inflation acts in the same direction and to a similar extent. The outlook largely reflects a government fiscal package containing major changes to indirect taxes with a positive overall effect on headline inflation, which will briefly outweigh the restrictive and anti-inflationary effect that the package of budgetary consolidation measures will have as a whole. Developments in the domestic real economy are so far roughly in line with the forecast and have an almost neutral effect in terms of the risks to the spring forecast. The paths of the exchange rate of the koruna and interest rates are almost in line with the spring forecast and do not pose a risk to the current one.

Beyond that, the Monetary Department’s economists perceive the following risks and uncertainties. The risk of increased inflation expectations and their impact on wages and pricing in companies is an upside risk. This could lead to inflation staying higher for longer. However, this risk is decreasing owing to falling inflation. A potential faster drop in the currently high savings rate, and a potential earlier recovery in household consumption and a resurgence of demand pressures are also an upside risk. With the exception of the presented recovery package, whose impacts can be at least partly qualitatively estimated now, the future course of fiscal policy both this year and the next is surrounded by some uncertainty. The future course of the war in Ukraine and its implications for prices of food and energy commodities represent a persisting external uncertainty.