Seðlabanki

Survey of market expectations

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 22 through 24 April. A total of 36 agents in the bond market, including banks, pension funds, mutual and investment funds, securities brokers, licensed asset management firms, and insurance firms were invited to participate. Responses were received from 29 market participants, giving a response ratio of 81%.

Highlights
The survey findings indicate that market agents expect inflation to average 5.9% in Q2/2024. This is slightly lower inflation than they expected in the last survey, but all measures of inflation expectations fell between surveys. Market agents expect inflation to measure 4.6% one year ahead, as opposed to 5.3% in the January survey. Furthermore, they expect inflation to measure 4% in two years, 3.8% on average in the next five years, and 3.5% in the next ten. The survey indicates that respondents expect the exchange rate of the króna to remain broadly unchanged in the coming term, with the EURISK exchange rate measuring 150 one year from now.

According to the median response in this survey, market agents assume that the Central Bank’s key rate has peaked at 9.25%. They expect the key rate to begin falling in Q3/2024, which is later than according to the previous survey. Market agents also expect the key rate to fall more slowly than in the last survey: they expect it to be 7.75% in one year and 6% in two years.

The share of respondents who considered the monetary stance too tight continued to rise between surveys, from 42% in January to 62% in this survey. On the other hand, the share who considered the monetary stance appropriate declined from 42% in the previous survey to 34% in this one, and the share who considered it too loose declined from 15% in January to 3% in this survey.

By most measures, the range of responses on inflation expectations narrowed between surveys, whereas the range of responses on interest rate expectations widened.

Market agents were also asked what effect they think Statistics Iceland’s new methodology for calculating the housing component of the CPI, to be adopted in June 2024, will have on short-term inflation. About 68% of respondents expect inflation to be higher as a result, and most of them specified that this was because house prices had risen well in excess of rent prices in the recent term, and higher property prices could therefore come to the fore in higher rent prices in the near future. About 18% of respondents expect inflation to be lower because of the change in methodology. Furthermore, a share of respondents stated that they expect the change to reduce volatility relating to house prices.

See here data on market expectations:

Survey of market expectations: Q2//2024. Published 2 May 2024

Older questions and special questions. Published 2 May 2024.