17 November 2016

Market expectations survey

Central Bank of Iceland

The Bank’s market expectations survey was carried out on 31 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 19 market participants, giving a response ratio of 66%.

The survey findings suggest that market agents’ short-term inflation expectations have declined since the Bank’s August survey, while their expectations one year and further ahead are broadly unchanged. According to the median response, survey participants expect inflation to measure 1.8% in Q4/2016, slightly more than in the last survey. Presumably, this is due to the increase in twelve-month inflation following Statistics Iceland’s correction of its inflation calculations for September. On the other hand, participants expect inflation to measure 1.7% in Q1 and Q2/2017, and about 1.9% in Q3. This is up to 0.4 percentage points lower than they expected in August. The survey also indicates that market agents expect inflation to measure 2.2% in one year and 3% in two years, and to average 3% over the next five years. This is virtually unchanged since the last survey. However, expectations concerning average inflation over the next ten years fell by 0.2 percentage points between surveys, to 2.8%. Furthermore, the survey indicates that respondents expect the EURISK exchange rate to be 117 in one year’s time; i.e., they expect the króna to be nearly 7% stronger than in the last survey.

According to the median response, survey participants expect the Central Bank's collateralised lending rate to be lowered by 0.25 percentage points by the end of this year, to 5.75%, and to remain there until Q4/2017, when it will be raised back to 6%. This is a slightly lower rate than they expected in the August survey, but it appears that the Bank’s rate cut in August took them by surprise, as they had expected incremental rate reductions in 2017.

At the time the survey was conducted, about 29% of respondents considered the monetary stance appropriate. This is roughly 13 percentage points higher than in the last survey. The percentage who considered the monetary stance too loose or far too loose was broadly unchanged, at 7%, and the percentage who considered it too tight or far too tight declined by nearly 15 percentage points, to 64%.

In the November survey, market agents were asked what they considered to be the main reason for the decline in nominal Treasury bond yields between mid-August and mid-October. Roughly half of the respondents were of the view that the Central Bank rate reduction in August and/or expectations of further rate cuts were the main reasons for the drop in bond market yields. In addition, market agents were asked what impact, if any, Statistics Iceland’s correction of its inflation calculations for September had on their inflation expectations. Just over half said the correction had raised their short-term inflation expectations (1-2 years ahead) slightly or somewhat but had not affected their longer-term expectations (5-10 years ahead), while just under half said the error had not affected their inflation expectations.

See the market expectations survey here: Market expectations survey, Q4/2016

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