Graph of Risks to the Inflation Projection (GRIP)
4th Situation Report 2022
The spring forecast was drawn up in an environment of still elevated uncertainties and risks, related, among other things, to the war in Ukraine, the future monetary policy stance abroad and the duration of the disruptions to global value chains.
Overall, the newly available information obtained since the spring forecast was prepared implies considerably higher levels of domestic inflation and interest rates overall in the GRIP simulation than in the spring forecast. The strongest factor in this direction is a substantial revision of foreign producer prices in both their core and energy components. A weaker exchange rate of the koruna against the euro in 2022 Q2 and, according to the updated short-term outlook, also in Q3 also has an inflationary effect. Faster price growth in April and May, combined with an upward revision to the outlook for administered prices, implies higher interest rates. In the GRIP, the domestic economy fosters lower rates and lower inflation. Wage growth in Q1 has the strongest effect in this respect. Although it reached a higher level in year-on-year terms, fundamental wage growth was below the forecast in quarter-on-quarter terms (due in large part to a revision of the rate of wage growth in the recent past). Owing to the smoothing in the interest rate rule (a lower initial interest rate level in late Q2), interest rates in the GRIP simulation foster substantially lower rates amid higher inflation in mid-2023.
Outside the GRIP, the threat of weaker anchoring of inflation expectations to the CNB’s 2% target remains an inflationary risk. The upside risks also include a less restrictive effect of fiscal policy this year and the next.
