Graph of Risks to the Inflation Projection (GRIP)

4th Situation Report 2021

The spring forecast was drawn up in an environment of still elevated risks and uncertainties. This was related mainly to the then peaking pandemic, due to which the Czech economy faced the most stringent government anti-epidemic restrictions to date. At the same time, the pandemic was reflected in an overloading of, or disruption to the smooth functioning of, global production and supply chains. Taking into account this exceptionally turbulent period, it can be said that the forecast in Monetary Policy Report – Spring 2021 has been materialising relatively well so far.

In the GRIP simulation, the updated external outlook fosters slightly higher domestic interest rates and inflation than in the current forecast. A better-than-expected course of the pandemic in the Czech Republic, which allowed for earlier and faster easing of anti-epidemic measures, contributes to an inflationary assessment of the domestic real economy. This is taken into account in the GRIP simulation through higher expected household consumption in 2021 Q2. Higher-than-expected growth in fundamental market wages at the start of the year also has an inflationary effect on the real economy. Domestic inflation also acts in the same direction in the GRIP simulation, due mostly to an upward revision of the outlook for administered prices for next year. These effects are only partly offset by a stronger-than-expected exchange rate of the koruna in Q2. Domestic interest rates have a broadly neutral effect in the GRIP simulation in Q2. The balance of risks to the forecast captured in this simulation thus implies slightly higher levels of both inflation and interest rates compared with the current forecast.

One of the risks outside the GRIP simulation is a renewed deterioration of the epidemic situation during the autumn leading to restrictions being reintroduced in the economy. Based on previous experience, the inflation consequences of such developments are not clear. On the other hand, if we assume that the pandemic will not return to any great extent in the foreseeable future, there is the risk of a faster restart of the economy and a related return of the domestic labour market to strongly overheated mode. We also identify a risk of a longer-lasting effect, or slower fade-out, of the overloading of global production chains, which leads to a substantial price increase in the production sector.

After taking these facts into account, the Monetary Department assesses the uncertainties and risks of the forecast in Monetary Policy Report – Spring 2021 as being inflationary overall and acting towards a need for a greater tightening of monetary policy compared with the current forecast.

Graph of Risks to the Inflation Projection (GRIP) - 4th SR