The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 19 through 21 January. 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 31 market participants, giving a response ratio of 79%.
Highlights
The findings suggest that market agents’ inflation expectations have risen slightly higher since the Bank’s November survey. According to the median response, market agents now expect inflation to measure 3.7% after one year; 3.1% after two years; and 3.2%, on average, over the next five years. This is 0.1-0.3 percentage points higher than in the previous survey. Respondents’ ten-year inflation expectations were unchanged between surveys, however, at 3%, on average. Market agents also expect the exchange rate of the króna versus the euro to be slightly lower after one year than it was at the time the survey was taken.
According to the median response in the survey, market agents expect the Central Bank’s key interest rate to be unchanged at 7.25% in Q1/2026 and then start to fall in Q2, reaching 6.5% by the year-end. This is 0.25 percentage points higher than in the November survey. Respondents’ expectations about the key rate two years ahead were unchanged between surveys, however, at 5.75%.
The share of respondents who considered the monetary stance too tight declined markedly, from 83% in the previous survey to 55% in this one. About 35% considered the monetary stance appropriate, up from 17% in November. Another 10% considered the stance too loose, while no respondents did so in the last survey.
The overall range of responses on inflation expectations over horizons ranging from Q1/2026 to five years widened between surveys, but the range of responses on average inflation ten years ahead narrowed. The overall range of responses on interest rate expectations in Q1/2026 widened between surveys but narrowed somewhat for expectations one and two years ahead.
Market agents were also asked what they estimated the term premium on nominal ten-year Icelandic Government bonds to be at the present time; i.e., what additional return investors demand for buying ten-year bonds instead of investing in a series of short-term bonds over the same period of time. A third of respondents said that the premium could range from 0.25 to 0.5 percentage points, and a fourth estimated it at more than 0.5 percentage points. Furthermore, just over a third of them estimated that the premium was close to zero or negative.