12 May 2016

Market expectations survey

Redwing and Central Bank of Iceland

The Bank’s market expectations survey was carried out on 2-4 May. 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 12 market participants, giving a response ratio of 41%.

The results of the survey indicate that market agents expect inflation to be lower in the next few months than in the last survey, carried out in February, but expect it to rise in the coming term. According to the median response, survey participants expect annual inflation to average 1.6% in Q2/2016, 1.9% in Q3/2016, and 2.9% in Q4/2016. This is about 0.3-0.6 percentage points lower than they expected in early February. The survey also suggests that respondents expect inflation to measure 3.2% in one year, which is 0.2 percentage points higher than in the last survey, and 3.4% in two years, which is 0.1 percentage point lower than in the last survey. Respondents expect inflation to average 3.1% over the next five years, a decline of 0.1 percentage points from the February survey. Expectations concerning average inflation over the next ten years rose by 0.2 percentage points between surveys, however, to 3.5%. Moreover, the survey indicates that respondents expect the EURISK exchange rate to be 136 in one year’s time, which means that they expect the króna to be over 2% stronger than in the last survey.

According to the median response, market agents expect the Central Bank’s collateralised lending rate to remain unchanged throughout 2016, whereas in the last survey they indicated that they expected it to be increased by ½ a percentage point in the latter half of the year. The current survey indicates, however, that they expect the collateralised lending rate to be raised by 0.25 percentage points, to 6.75%, at the beginning of 2017, and to have been lowered back to 6.5% in two years. This is about 0.5 percentage points lower than in the last survey. At the time the survey was conducted, about 25% of respondents considered the monetary stance appropriate. This is about 12½ percentage points lower than in the last survey. The percentage who considered the monetary stance too loose or far too loose rose from 19% to 25%, however, and the percentage who considered it too tight or far too tight rose from 44% to 50%.