What is the GRIP?

At monetary policy meetings where there is no new forecast but new observed data are available, the Graph of Risks to the Inflation Projection (GRIP) is used as a guide for the Bank Board and communication with the public. The GRIP indicates the effect of new information on the outlook for headline inflation and interest rates. New information is divided into five areas: external variables, the domestic real economy, inflation, the exchange rate and interest rates.

The GRIP is created using the core prediction model, into which new information is entered. This produces deviations in the outlook for headline inflation and interest rates from the baseline scenario of the current forecast. By comparison with the full-fledged forecasting exercise, the effects of the risks shown (the individual points of the GRIP) are rough quantifications of the effect of new information.

The figure below illustrates the GRIP. The horizontal axis shows the deviation of the simulation from the current headline inflation forecast at the beginning of the monetary policy horizon (i.e. in four quarters’ time). The vertical axis indicates the effect of new information on the average deviation of 3M PRIBOR interest rates at the one-year horizon (i.e. over the next four quarters). The effect on average interest rates is shown because smoothing is present in the monetary policy reaction function in the prediction model.

With regard to risk assessment, the GRIP does not take into account the full set of new information, but only information whose effects can easily be quantified using the core prediction model. The assessment of the overall balance of risks to the current forecast from the perspective of the Monetary Department is therefore given verbally in an accompanying commentary.

Graph – Graph of Risks to the Inflation Projection (GRIP)