The measuring of financial market inflation expectations, a standard analytical approach of central banks, occupies a particularly important place in the inflation-targeting monetary policy scheme. The central bank’s monetary policy decision-making is based on an analysis of current and predicted future developments in the economy and the factors affecting them. The forecasts for inflation and economic growth are therefore key variables affecting the future monetary policy settings. The major factors also include selected financial market indicators, such as interest rates and the exchange rate.
The financial market indicators together reflect market participants’ valuations of various financial assets and their expectations of the future trend in these prices relative to particular economic developments. They thus respond directly to changes in market conditions caused, for example, by monetary policy measures, the release of the latest macroeconomic figures, exogenous shocks, and the political situation. Their immediate response to published events makes interest rates and the exchange rate good indicators of changes in financial market expectations.
The CNB started regular measurement of inflation expectations on the financial market in May 1999 in order to monitor and assess changes in the predictions for inflation, GDP, wages and financial market indicators. The aim of the survey of analysts is to get their views on the expected evolution of macroeconomic indicators and to compare their expectations with the CNB’s forecast. The set of respondents is made up of analysts from large banks and brokerage companies who are highly active on the money and capital markets and who agreed to assist the CNB. Using standardised questionnaires (xls, 40 kB), the CNB requests their forecasts for the following indicators at monthly intervals:
- year on year consumer price index at the one-year and three-year horizons;
- the settings of the CNB’s 2W repo rate, 12M PRIBOR, 5Y IRS and 10Y IRS at the one-month and one-year horizons;
- the CZK/EUR exchange rate at the one-month and one-year horizons;
- year on year GDP growth at the end of the current year and the end of the following year;
- year on year nominal wage growth at the end of the current year and the end of the following year.
This information serves primarily for the CNB’s monetary policy purposes, i.e. how inflation expectations are developing and whether they are consistent with those of the CNB and the subsequent actual outturns. It is also used for comparison with financial market expectations ascertained indirectly from yield curves and for any correction of those expectations.