05 November 2015

Market expectations survey

Central Bank of Iceland

The Bank’s market expectations survey was carried out on 29 October – 2 November. A total of 29 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 13 market participants, giving a response ratio of 45%.

The results of the survey suggest that market agents’ short-term inflation expectations have declined since the August survey but that their long-term expectations are broadly unchanged. According to the median response, survey participants expect annual inflation to average 2.2% in Q4/2015, 2.6%% in Q1/2016, and 2.9% in Q2/2016. This is about 0.7-1.1 percentage points lower than they expected in August. The survey also indicates that respondents expect inflation to measure 3.8% in one year. This is 0.1 percentage point less than in August. The survey findings indicate, however, that respondents project twelve-month inflation at 4% in two years, or 0.5 percentage points more than in August. Expectations concerning average inflation over the next five years were unchanged at 3.5% between surveys, whereas expectations about average inflation over the next ten years have declined by 0.2 percentage points, to just under 3.3%. Moreover, the survey indicates that respondents expect the EURISK exchange rate to be 138 in one year’s time, which means that they expect the króna to be about 5% stronger than in the last survey.

According to the median response, market agents expect the Central Bank’s collateralised lending rate to be held unchanged at 6.25% through the end of this year. This is 0.25 percentage points lower than in the August survey. The current survey indicates, however, that as in August, respondents expect the collateralised lending rate to have risen to 7% by mid-2016. At the time the survey was conducted, about 46% of respondents considered the monetary stance appropriate. This is about 20 percentage points lower than in the last survey. The percentage who considered the monetary stance too loose or far too loose rose from 28% to 38½%, however, and the percentage who considered it too tight or far too tight rose from 6% to 15½%.

In the October survey, market agents were asked what they considered the main cause of the decrease in the five- and ten-year breakeven inflation rate in the bond market since the end of June. The majority of respondents considered non-residents’ new investment in domestic Treasury bonds to be the main reason for the decline.

See the market expectations survey here: Market expectations survey Q4/2015

Further information on the market expectations survey can be found here: Market expectations survey