The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 5 through 7 May 2025. A total of 39 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 25 market participants, giving a response ratio of 64%.

Highlights

The survey findings suggest that market agents’ year-2025 inflation expectations have risen slightly since the Bank’s January survey. Their expectations one year ahead and for longer horizons declined between surveys, however. According to the median response, market agents now expect inflation to measure 3.3% after one year; 3% after two years; and around 3%, on average, over the next five and ten years. This is 0.3-0.4 percentage points lower than in the previous survey. The survey results indicate that market agents expect the króna to depreciate in the coming term, with the EURISK exchange rate measuring 149 in one year’s time.

According to the median response, survey participants expect the Central Bank’s key interest rate to be 7.5% at the end of Q2/2025, which is 0.25 percentage points higher than they expected in the previous survey. They expect the key rate to be 6% in one year and 5.75% in two years, which is broadly in line with the previous survey.

The share of respondents who considered the monetary stance too tight declined from 80% in the previous survey to 64% in this one. About 36% considered the monetary stance appropriate, as compared with 20% in January, and none considered it too loose.

The range of responses on inflation was narrower for most time horizons than in the January survey. The range of responses on interest rates narrowed as well, for both Q2/2025 and Q3/2025. For expectations on interest rates for four quarters ahead, the range widened between surveys, however, while the range of responses on interest rates for other horizons held virtually unchanged.

Survey participants were also asked about the impact of growing protectionism in international trade and higher tariffs on their expectations about domestic inflation over the two years ahead. Roughly 60% of respondents expected that tariffs would increase inflation, including through higher input prices. Some respondents noted that they expect a slowdown in global and domestic economic activity which could ease inflationary pressure, all else being equal. Nevertheless, most respondents agree that the situation is highly uncertain.