22 May 2014

Market expectations survey

During the period from 12-14 May, the Central Bank of Iceland carried out a survey of market participants’ expectations concerning a variety of economic variables, including inflation and interest rates. A total of 31 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 23 market participants, giving a response ratio of 74%.

The May survey shows that market agents’ short-term expectations of annual inflation have fallen since the last survey, which was carried out in early February. According to the median response, respondents expect annual inflation to average 2.4% in Q2/2014 and Q3/2014. This is about 0.4-0.6 percentage points lower than in the last Central Bank survey. The survey findings also show that market agents expect inflation to measure 3.1% in one year 3.5% in two years, which is broadly unchanged from the last survey. The results also show that market agents expect annual inflation to average 3.6% over the next five years and 3.8% over the next ten years. This is a reduction of 0.2 percentage points from the Bank’s February survey. Market agents’ expectations concerning the EURISK exchange rate one year ahead are unchanged from the last survey, at 160 krónur per euro. 

In the May survey, the market agents who did not expect inflation to be at the Bank’s 2.5% target in the long run were asked why. The vast majority of them cited external conditions as the main reason the Bank would be unable to keep inflation at target for the long term.

As in February, according to the median response, market agents expect the Central Bank’s collateralised lending rate to remain unchanged at 6% until Q1/2015, when it will be raised by 0.25 percentage points, to 6.25%, and then, in two years’ time, it will be raised to 6.5%. When the survey was conducted, 50% of market agents considered the monetary stance too tight or far too tight. This was about 8 percentage points more than in the last survey. About 41% considered the monetary stance appropriate. Just over 9% considered it too loose or far too loose, which is about 4 percentage points more than in the February survey.

See the market expectations survey here: Market Expectations survey 2Q2014 (Excel-file)

See also: Market expectations survey