CNB Bank Board decisions from other years
Voting of the Bank Board
The Graph of Risks to the Inflation Projection (GRIP for short) is a visual aid capturing the risks to the latest macroeconomic forecast by means of an assessment of the effect of new information on the outlook for headline inflation and interest rates. It has been used in the form based on the CNB’s core prediction model (formerly the QPM, now “g3”) since June 2004. The assessment of the risks to the latest forecast is conducted by means of simulations in the core prediction model, into which new pieces of information are entered. This produces deviations in the outlook for headline inflation and interest rates from the baseline scenario of the current forecast. The GRIP is one of the inputs to the Bank Board’s decision-making between two forecasts and is a standard part of the “small” situation reports. Publication of the GRIP further enhances the predictability and credibility of CNB monetary policy.
The GRIP is based on a two-dimensional coordinate system. On the horizontal axis, the distance from the intersection point shows the deviation of the simulation from the current headline inflation forecast at the beginning of the monetary policy horizon (t+4 quarters). The vertical axis indicates the effect of new information on the average deviation of interest rates (3M PRIBOR) at the horizon of t+1 to t+4 quarters, where t is the current quarter (the quarter of preparation of the “small” situation report). The effect on average interest rates is shown because smoothing is present in the monetary policy reaction function in the prediction model.
The points shown on the GRIP depict the partial effects of individual sets of new information. These effects are assessed ceteris paribus, i.e. other things being equal. In the g3 model, the order of the simulations of new pieces of information (or sets thereof) is not important.
Preparation of the GRIP does not represent preparation of a full-fledged forecast, but rather involves the relatively mechanistic incorporation of new information without significant expert adjustments. The risks assessed (new information available) can be divided into the following areas: external variables, domestic real economy, inflation, exchange rate and interest rates.
The “External Environment” point on the GRIP indicates the direction and size of the shift in the forecast with knowledge of new data on the evolution of key foreign variables and changes in their outlook. The outlooks for foreign variables are taken mainly from Consensus Forecasts (CF) and market outlooks. The CF forecasts describe the expected future evolution of effective GDP in the euro area (a proxy for external demand) and producer price inflation in the effective euro area. The 3M EURIBOR outlook is updated on the basis of market observations.
The effect of new data on GDP, the structure of GDP and on wages in market sectors is reflected in the “Real Economy” point. Revisions to time series also tend to have an effect on this point. New data are incorporated into the GRIP simulation in such a way that the expert adjustments from the latest forecast and long-term trends are not usually reassessed. The “Real Economy” point thus expresses the mechanistic shift of the current forecast given more precise knowledge of the actual level and structure of GDP and wage growth, without a full reassessment of the domestic initial state.
The “Inflation” point indicates the shift of the current forecast using a revised version of the short-term inflation prediction. When simulating the effect of new domestic inflation data, two new monthly inflation observations are usually available in the current quarter. As the prediction model works with quarterly data, inflation developments in the current quarter are calculated on the basis of the new data and the as yet unavailable data are replaced with the month-on-month rate according to the current forecast. In addition, updated outlooks for administered prices and indirect tax changes are entered into this simulation.
The “Exchange Rate” point on the GRIP illustrates the shift of the forecast in response to the new short-term prediction for the CZK/EUR exchange rate in the current quarter. It is calculated as the average of the daily observations for the entire quarter, with the known values observed during the quarter being complemented with the most recent daily observation for the rest of the quarter.
Similarly, the “Interest Rates” point describes the effect of a potential deviation of average 3M PRIBOR market rates in the given quarter from the forecast. The average of the daily observations for the entire quarter is also entered into the model, with the known values observed during the quarter being complemented with the most recent daily observation for the rest of the quarter.
By comparison with the full-fledged forecasting exercise, the effects of the risks shown (the individual points of the GRIP) are merely rough quantifications of the effect of new information and are surrounded by varying degrees of uncertainty. In addition, the GRIP does not take into account the full set of new information, but only the part that can be assessed in a relatively mechanistic way using the core prediction model. The final balance of risks to the forecast can therefore be obtained by summing the individual points on the GRIP, but, in light of the above, is not presented on the graph. The resulting assessment of the overall balance of risks to the current forecast from the perspective of the Monetary Department, which also takes into account information outside the GRIP, is given verbally in an accompanying text that is also published.