The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 3-5 November. A total of 38 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 30 market participants, giving a response ratio of 79%.
Highlights
The survey results indicate that market agents’ Inflation expectations have held broadly unchanged since the previous survey, taken in August. Market participants now assume that inflation will decline in the near future, and according to the median response, they expect inflation to measure 3.4% after one year; 3% after two years; and 3%, on average, over the next five and ten years. The survey results indicate that respondents expect the króna to depreciate in the coming term, with the EURISK exchange rate measuring 149.5 in one year’s time.
According to the median response in the survey, market agents expect the Central Bank’s key rate to be unchanged at 7.5% in Q4/2025 and then start to fall in the beginning of next year. Survey participants expect the key rate to fall slightly faster than they assumed in August, to 7% by the end of Q1/2026 and 6.25% by the end of that year. Their 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 rose markedly, from 43% in the previous survey to 83% in this one. About 17% considered the monetary stance appropriate, down from 43% in August. No market participants considered the monetary stance too loose, whereas 14% did so in August.
The overall range of responses on inflation in Q4 and as an average over the next five years narrowed between surveys but was virtually unchanged for other horizons. The overall range of responses on interest expectations in Q4 narrowed between surveys but widened somewhat for expectations one and two years ahead.
Market agents were also asked what they considered the main driver of the appreciation of the króna in 2025. Two-thirds of respondents cited reduced pension fund demand for foreign currency as a factor in the appreciation. Some respondents also mentioned strong exports, especially in tourism, and increased capital inflows relating to non-residents’ investment in domestic assets.