Graph of Risks to the Inflation Projection (GRIP)
2nd Situation Report 2023
Overall, the newly available information obtained since the winter forecast was prepared implies slightly higher inflation overall and broadly the same interest rates on average in the GRIP simulation compared to the winter forecast. Above all, the updated view of the trend in the domestic real economy and on the labour market, specifically mainly in the wage area, puts upward pressure on the path of domestic interest rates. This factor also fosters slightly higher inflation over the monetary policy horizon. The observed inflation data and the updated short-term inflation outlook (for Q2) are also slightly inflationary. Lower-than-forecasted domestic interest rates in 2023 Q1 provide a slight impulse towards lower rates in the future, too, amid marginally higher inflation over the monetary policy horizon. Exchange rate developments are the main anti-inflationary factor, partly offsetting the previous effects, as they foster lower interest rates and lower inflation. The new outlook for external variables, including ECB monetary policy, has a broadly neutral effect.
Outside the GRIP, a wage-price spiral and more expansionary fiscal policy are upside risks to inflation. The threat of inflation expectations becoming unanchored remains a significant risk in the same direction. By contrast, a stronger-than-forecasted downturn in domestic consumer and investment demand is a downside risk. The persistence of inflation and hence its pace of decrease towards the inflation target is a risk in both directions. Volatility in global financial markets is an uncertainty in both directions for the outlook for the monetary policy stance of foreign central banks and for the degree of tightening of financial conditions. The general uncertainties of the outlook include the future course of the war in Ukraine, and the availability and prices of energy.