Graph of Risks to the Inflation Projection (GRIP)
8th Situation Report 2020
The CNB’s forecast from Inflation Report IV/2020 was prepared at a time of extraordinary risks and uncertainties stemming mainly from the ongoing second wave of the pandemic and its economic impacts. In the GRIP simulation, new data indicating a stronger-than-expected recovery of the domestic economy and wage growth in the summer, coupled with the expansionary fiscal package in its original form approved by the Chamber of Deputies of the Parliament of the Czech Republic, act towards higher inflation and significantly higher domestic interest rates overall. However, this is largely offset by a stronger koruna and an anti-inflationary effect of developments abroad. The balance of risks to the forecast captured in the GRIP simulation is therefore taking shape towards moderately higher inflation and in particular higher interest rates compared to the current forecast.
During the preparation of the forecast, the possibility of a worse second wave of the coronavirus pandemic was identified as the main risk. Although newly available foreign data for Q4 so far (taken into account in the GRIP) are signalling a slightly greater economic contraction in the euro area owing to a deterioration of the epidemic situation in many countries, with the end of the pandemic in sight, the longer-term outlook for external economic activity is generally improving. The risk of the worse pandemic scenario contained in Inflation Report IV/2020, associated with longer-lasting and broader shutdowns of the economies of the Czech Republic’s trading partner countries and of domestic industry, is thus not materialising so far. By contrast, the risk described in the fiscal scenario in the same report is beginning to materialise to a significant extent. The risk of a no-deal Brexit is increasing as the year-end approaches. The structure of supply and demand factors at home and abroad and their impact on inflation remain a general uncertainty of the forecast.
After taking these facts into account, the Monetary Department assesses the risks to the Inflation Report IV/2020 forecast in the context of the ongoing second wave of the pandemic as remaining very substantial and as being tilted to moderately higher inflation and interest rates overall.
