Graph of Risks to the Inflation Projection (GRIP)
8th Situation Report 2021
The autumn forecast was drawn up in an environment of still elevated uncertainties and risks. Among other things, they were related to the duration of the global production and supply chain disruptions, increasing inflation expectations and the exchange rate of the koruna. Overall, the newly available information obtained since the autumn forecast was prepared implies considerably higher levels of inflation and interest rates overall in the GRIP simulation than in the autumn forecast.
In the GRIP simulation, the updated external outlook fosters higher inflation and slightly higher interest rates in the domestic economy, mainly due to a major upward revision of industrial producer price inflation in the euro area. Appreciably higher domestic consumer price inflation, whose deviation from the forecast in the autumn was driven mainly by core inflation, has an even more inflationary effect in the simulation. The domestic real economy also fosters higher interest rates and slightly higher inflation in the GRIP, as the economic recovery and wage growth were more pronounced in Q3 than in the autumn forecast. The exchange rate of the koruna, which is weaker than forecasted at the year-end, acts in the same direction. Owing to their lower initial level in Q4 and to the smoothing in the interest rate rule, interest rates in the GRIP simulation foster lower rates next year, amid consistently slightly higher inflation at the end of next year.
Outside the GRIP, the threat of weaker anchoring of inflation expectations in an environment of a long-running marked overshooting of the CNB’s 2% target remains an inflationary risk. Possible faster and longer-lasting growth in industrial producer prices abroad is a risk in the same direction. A potential weakening of the response of the exchange rate of the koruna to increases in the CNB’s monetary policy interest rates is also an upside risk to inflation.
