Publication of the graph of risks to the inflation projectioN (GRIP)
At its May 2011 meeting the CNB Bank Board decided to begin publishing on the CNB website the Graph of Risks to
the Inflation Projection (GRIP for short) along with a commentary. The GRIP will be published together with the minutes
of monetary policy meetings at which no new forecast is made available. The GRIP was published for the first time after
the Bank Board meeting held in June 2011.
The GRIP is a visual aid capturing the risks to the latest macroeconomic forecast by means of an assessment of
the effect of new information on the outlook for headline inflation and interest rates. It has been used in the form
based on the CNB’s core prediction model (formerly the QPM, now “g3”) since June 2004. The assessment of the risks
to the latest forecast is conducted by means of simulations in the core prediction model, into which new pieces of
information are entered. The model responses reveal deviations in the outlook for headline inflation and interest rates
from the baseline scenario of the current forecast. The GRIP is one of the inputs to the Bank Board’s decision-making
between two forecasts and is a standard part of the “small” situation reports. Publication of the GRIP further enhances
the predictability and credibility of CNB monetary policy.
The points shown on the GRIP depict the partial effects of individual sets of observations. These effects are assessed
ceteris paribus, i.e. other things being equal. In the g3 model, the order of the simulations of new pieces of information
(or sets thereof) is not important.
The GRIP is based on a two-dimensional coordinate system. On the horizontal axis, the distance from the intersection
point shows the deviation of the simulation from the current headline inflation forecast at the beginning of the monetary
policy horizon (t+4 quarters). The vertical axis indicates the effect of new information on the average deviation of
interest rates (3M PRIBOR) at the horizon of t+1 to t+4 quarters, where t is the current quarter (the quarter of
preparation of the “small” situation report). The effect on average interest rates is shown because smoothing is present
in the monetary policy reaction function in the prediction model.
Preparation of the GRIP does not represent preparation of a full-fledged forecast, but rather involves the relatively
mechanical incorporation of new information without significant expert adjustments. The risks assessed (new
information available) can be divided into the following areas: initial state, external environment, inflation, exchange
rate and interest rates.
The effect of new data on GDP, the structure of GDP and on wages in the business sector is reflected in the GRIP by
a mechanical update of the initial state of the forecast. Revisions to time series rank among the potential reasons
for changing the initial state. New data are incorporated into the GRIP simulation in such a way that the expert
adjustments from the latest forecast and long-term trends are not usually reassessed. The “Initial state” point on
the GRIP thus expresses the shift of the current forecast given more precise knowledge of the actual level and structure
of GDP and wage growth.
The outlooks for foreign variables entering the forecast are taken mainly from Consensus Forecasts (CF) and market
outlooks. The CF describes the outlook for effective GDP in the euro area (a proxy for external demand) and producer
price growth in the effective euro area. The 3M EURIBOR outlook is updated on the basis of market observations.
The “External environment” point on the GRIP indicates the direction of the shift in the latest forecast with knowledge
of new data on the evolution of these foreign variables and the outlook for them.
When simulating the effect of new domestic inflation data, two new monthly inflation observations are usually available
in the current quarter. As the prediction model works with quarterly data, inflation developments in the current quarter
are calculated on the basis of the new data and the as yet unavailable data are replaced with the month-on-month rate
according to the current forecast. In addition, updated outlooks for administered prices and indirect tax changes are
entered into this simulation. The “Inflation” point thus indicates the shift of the current forecast using a revised version
of the short-term inflation prediction.
New information on the evolution of the domestic nominal monetary conditions can be described using the updated
near-term exchange rate prediction for the first quarter of the current forecast and by taking into account the current
evolution of domestic market interest rates. This information is incorporated into the GRIP using the change in
the fixation of the near-term exchange rate prediction and the fixation of domestic interest rates. The updated nearterm
prediction for the exchange rate and interest rates is calculated as the average of the daily observations for
the entire quarter, with the known values observed during the quarter being complemented with the most recent daily
observation for the rest of the quarter. The “Exchange rate” point on the GRIP thus illustrates the shift of the forecast
in response to the new near-term prediction for the CZK/EUR exchange rate in the current quarter. The simulation
for the “Interest rates” point describes the effect of potential non-fulfilment of the current forecast stemming from
the existing deviation of average 3M PRIBOR market rates from the forecast assumptions.
By comparison with the full-fledged forecasting exercise, the effects of the risks shown (the individual points of
the GRIP) are merely rough quantifications of the effect of new information and are surrounded by varying degrees
of uncertainty. In addition, the GRIP does not take into account the full set of new information, but only the part that
can be assessed in a relatively mechanical way using the core prediction model. Obtaining the final balance of risks to
the forecast by summing up the individual points on the GRIP is therefore possible, but only with the aforementioned
knowledge. The creator of the graph – the CNB Monetary and Statistics Department – therefore does not perform
vector summation of the points in the GRIP. The resulting assessment of the overall balance of risks to the current
forecast from the perspective of the Monetary and Statistics Department, which also takes into account information
outside the GRIP, is given verbally in an accompanying text that is also published.