Risks to the inflation forecast

2nd Situation Report 2024

The update of the winter forecast leads to slightly slower inflation this year amid a higher interest rate path. The path is affected by a markedly higher outlook for foreign rates and a somewhat weaker koruna. The new outlooks for foreign and domestic economic variables do not cast any doubt on inflation staying close to the CNB’s 2% target over the entire forecast horizon.

However, new data from the domestic economy and abroad obtained since the winter forecast was prepared imply slightly higher consumer price inflation at the monetary policy horizon (but still close to 2%). This is due mainly to a somewhat stronger depreciation of the koruna in the first quarter and a more gradual and later decline in European Central Bank rates expected by markets, which fosters a weaker koruna and higher import prices through a narrower interest rate spread. The better condition of the domestic economy at the end of last year acts in the same direction, albeit to a lesser extent.

Beyond these simulations, the Monetary Department’s economists perceive the following risks and uncertainties. A longer-lasting depreciation of the koruna is an upside risk to inflation. Moreover, there are some longer-term upside risks, although their relevance is decreasing over time. They include continued wide general government deficits, which may potentially affect future inflation, and elevated inflation expectations. By contrast, a stronger-than-expected downturn in global economic activity and a slowdown in German economic output are a downside risk to inflation.