Graph of Risks to the Inflation Projection (GRIP)
2nd Situation Report 2022
In March 2022, the Czech National Bank undertook an exceptionally comprehensive, albeit still internal, update of the winter forecast, the materialisation of which has been significantly affected by Russia’s invasion of Ukraine. The points on the GRIP thus take into account not only the newly available data obtained since the winter forecast was prepared, but also marked changes in the outlooks for foreign and domestic variables and related expert calculations and adjustments reflecting the impacts of the war. The GRIP simulation implicitly assumes a gradual de-escalation of the war in Ukraine in an unspecified form. In the current situation, the uncertainty surrounding future economic developments is unprecedentedly high. At the same time, the simulation assumes standard behaviour of an inflation-targeting central bank, for which fulfilment of the inflation target over the monetary policy horizon is a clear priority. The new information will be captured in full in the spring forecast to be published in early May.
The GRIP simulation thus implies considerably higher levels of both domestic inflation and interest rates compared with the winter forecast. The strongest factor in this direction is a substantial revision of foreign producer prices and the energy price outlooks. Markedly higher domestic inflation – both the inflation observed at the start of the year, which was not yet affected by the situation in Ukraine, and the newly expected inflation in the months ahead – acts in the same direction. The recent depreciation of the koruna exchange rate and its only gradual return to the originally assumed path – despite a relatively strong subsequent correction supported by CNB interventions – also has an inflationary effect. The negative economic impacts of the war and the newly imposed trade sanctions on the domestic economy, coupled with weaker observed wage growth at the close of last year and a downward expert adjustment of the wage growth outlook, foster lower interest rates. Domestic interest rates have a neutral effect in the GRIP simulation.
Outside the GRIP, the threat of weaker anchoring of inflation expectations to the CNB’s 2% target remains an inflationary risk. The possibility of a longer-lasting conflict in Ukraine, which would be reflected, among other things, in a less restrictive effect of fiscal policy this year, is a risk in the same direction. By contrast, worse economic developments having an impact on the labour market and related lower demand-driven inflation are an anti-inflationary risk outside the GRIP.
