Risks to the inflation forecast

8th Situation Report 2023

Overall, the autumn macroeconomic forecast is materialising fairly well and the path of inflation is broadly in line with the CNB’s expectations. However, the updated short-term inflation outlook has shifted slightly higher, due mainly to a revised estimate of administrative effects in housing costs from the start of 2024 onwards. Nonetheless, 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, i.e. in the first half of 2025. 

New data from the domestic economy and abroad obtained since the autumn forecast was prepared suggest that the Czech economy will remain subdued for longer. According to the Monetary Department, these data at the same time imply slightly lower headline inflation overall at the monetary policy horizon. However, inflation will be higher than forecasted in the next few quarters due to higher growth of administered prices, especially energy prices and other housing-related costs. Nonetheless, a worse overall outlook for the external environment and a weaker condition of the domestic economy will gradually outweigh the short-term inflationary cost and administrative factors. This fosters lower inflation and a lower interest rate path than in the autumn forecast in the longer term.

Beyond these simulations, the Monetary Department’s economists perceive the following risks and uncertainties. The threat of greater repricing in January amid elevated inflation expectations is an upside risk. Another upside risk is linked with the large general government deficits recorded in recent years, which may affect inflation in 2024. Uncertainties are associated with the effect of fiscal policy in 2023 and 2024, the pass-through of energy prices to prices of final production and the future evolution of the saving rate.