Inflation expectations in the CNB's modelling system
Inflation expectations have a special position in the inflation targeting regime. The deviation of expectations from the inflation target determines the credibility of the target or even the credibility of monetary policy itself. Inflation expectations also play an important role in determining whether monetary policy is tight or easy. This is because real interest rates, defined as the difference between nominal interest rates and future inflation expectations, are the main component of the monetary conditions.
In the CNB's modelling system, inflation expectations are estimated. The inflation expectations obtained from statistical surveys (see the box in the July 2003 Inflation Report) and regularly described in this section are not inputted directly into the modelling system, but are used to check the consistency of the model expectations with the statistically measured expectations. The reason for this is that statistical measures of inflation expectations are associated with many imperfections, meaning that the expectations measured may not correspond to actual ones and are highly volatile.
The modelling system assumes that inflation expectations are formed predominantly by the latest inflation developments and to a lesser extent by the forecast for future inflation (in a ratio of 90:10).