The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 2-4 November. A total of 37 agents in the bond market, including banks, pension funds, mutual and investment funds, securities brokers, and licensed asset management firms were invited to participate. Responses were received from 31 market participants, giving a response ratio of 84%.
Highlights
According to the median response, market agents expect higher inflation in coming quarters than they did in the August survey. They expect inflation to taper off quickly in 2027, however, to 3.7% in one year’s time, or 0.2 percentage points less than in the last survey. They also expect inflation to measure 3% in two years, or 0.5 percentage points lower than in the August survey. Their inflation expectations for the next five years declined slightly as well. Their expectations concerning average inflation over the next ten years are unchanged between surveys, however, at 3%. Market agents also expect the exchange rate of the króna against the euro to be slightly lower in one year than it was when the survey was conducted.
Their expectations about the Central Bank’s key interest rate through mid-2027 are unchanged from the last survey, but they now expect interest rates to fall more rapidly from Q3/2027 onwards. According to the median response, they expect the key rate to be unchanged at 8% in Q4/2026 and then start declining in Q1/2027. They expect the key rate to be 6% in two years’ time, whereas in the last survey they expected it to measure 6.25%.
The share of respondents who considered the monetary stance too loose shrank markedly between surveys, from 33% in August to the current 3%. On the other hand, the share who considered the stance too tight increased from 50% to 65%, and the share who considered it appropriate grew from 17% to 32%.
The overall range of responses on inflation expectations widened between surveys for all horizons. The overall range of responses on developments in the key interest rate in coming quarters narrowed between surveys, although it widened for expectations one and two years ahead.
Market agents were also asked what they consider the main reason for the rise in yields on short- and medium-term indexed Government bonds since the beginning of March. Most respondents considered it to be due to expectations of a tighter monetary stance than previously anticipated. A small number of respondents also cited higher real interest rates abroad.