Graph of Risks to the Inflation Projection (GRIP)
4th Situation Report 2011
The model simulation results captured in the GRIP represent balanced risks to the forecast for headline inflation published in Inflation Report II/2011 amid a moderate risk in the direction of lower interest rates. The external environment has the biggest impact on the balance of risks, reflecting above all a lower market outlook for foreign interest rates as from the end of 2011. By contrast, higher domestic inflation in May 2011 has a slight inflationary effect. The other values in the graph are close to the intersection point of the axes. The evolution of domestic interest rates and the exchange rate during 2011 Q2 is in line with the forecast and therefore has a neutral effect. The overall effect of the initial state is also broadly neutral despite faster growth in wages and GDP in 2011 Q1 compared to the forecast in Inflation Report II/2011. This is because the current upward deviations from the forecast are offset in the GRIP by a more anti-inflationary structure of economic growth, not only in 2011 Q1, but also in the past owing to a revision of the historical data.
Other risks and uncertainties exist beyond the GRIP simulation. Interest rates and external demand are the main uncertainties, followed by the duration of the inflationary effect of global commodity prices on domestic inflation. A part of the inflation deviation caused by the one-off jump in food prices may be offset by more moderate price growth in the months ahead. Unlike the partial GRIP simulations, the full incorporation of new information from the real economy into the next forecast may have a slight inflationary effect. Proposals for future VAT rate changes remain a significant upside risk to the headline inflation forecast, but their effects on the current monetary policy settings are weak, as shown in an alternative scenario in Inflation Report II/2011.
We therefore assess the overall balance of risks to the monetary-policy relevant inflation forecast published in Inflation Report II/2011 as balanced. The balance of risks to the headline inflation forecast is on the upside owing to the planned VAT changes.