24 May 2012

Survey of market expectations

The Central Bank of Iceland began conducting quarterly surveys of market agents’ expectations at the beginning of this year concerning a variety of economic variables such as inflation and interest rates. The survey is modelled on comparable surveys carried out by central banks around the world. During the period 7-11 May the Central Bank’s second survey was carried out. A total of 35 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 22 market agents, or 63% of those invited.

According to the median response of the survey, market agents expected annual inflation to be around 6% for the remainder of this year, that it will have subsided to 5.5% in one year and will still measure 5.4% in two years. The survey showed that market agents expected higher inflation this May than they did in the February-survey. Over the longer term, respondents expected inflation to average 5% over the next 10 years, which is an increase of ½ percentage point since the last survey.

Market agents expected the Central Bank of Iceland policy rate to be raised by another 1 percentage point over the remainder of 2012. According to this, the Central Bank of Iceland’s collateralised lending rate would be 5.5% at the end of June 2012 and 6% by the end of the year. It should be noted that the Central Bank’s interest rates were raised by ½ percentage point after the survey was conducted and the collateralised lending rate now measures 5.5%.

Most market agents perceived the monetary policy stance to be too loose at the time when the survey was conducted with regards to the Central Bank's mandate of keeping inflation on average close to 2½%. In most market agents’ opinion the monetary policy stance will be appropriate in one year’s time.


No. 20/2012
23 May 2012