Risks to the inflation forecast

6th Situation Report 2023

Overall, the CNB’s summer macroeconomic forecast is materialising well and inflation is falling in line with expectations. The new outlooks for foreign and domestic economic variables do not cast any doubt on the fulfilment of the CNB’s 2% inflation target at the monetary policy horizon either. However, new data from the domestic economy and abroad have increased the probability of Czech economic growth remaining subdued for some time.

Overall, according to the Monetary Department, the newly available information obtained since the summer forecast was prepared implies slightly lower headline inflation at the monetary policy horizon amid somewhat lower interest rates than in the summer forecast.  Downward pressure is being exerted on interest rates and inflation by the updated outlook for the domestic economy, especially wages, and to a similar extent also by the new external environment outlook. The path of domestic inflation so far is broadly in line with the forecast and has an almost neutral effect. The effect of higher initial interest rates, which are only slightly above the forecast, is also negligible. The weaker observed koruna-euro exchange rate is the main inflationary factor, partly offsetting the other effects.

Beyond that, the Monetary Department’s economists perceive the following risks and uncertainties.  The threat of increased inflation expectations and their impact on wage growth and pricing in companies is an upside risk. A potential faster drop in the currently high saving rate, with a potential earlier recovery in household consumption and a resurgence of demand pressures, is also an upside risk. By contrast, a stronger-than-expected downturn in economic activity in Germany is a downside risk. The effect of fiscal policy this year and the next remains a domestic uncertainty. The future course of the war in Ukraine is a persisting external uncertainty. Economic developments in China are a highlighted uncertainty.