11 May 2018

Survey of market expectations

Central Bank of Iceland

The Bank’s market expectations survey was carried out between 2 and 4 May 2018. A total of 29 agents in the market, including banks, pension funds, mutual and investment funds, securities brokers, and licensed asset management firms were invited to participate. Responses were received from 21 market participants, giving a response ratio of 72%.

The survey findings suggest that market agents’ short- and long-term inflation expectations are broadly unchanged since the Bank’s late January survey. According to the median response in this survey, participants expect inflation to measure 2.4-2.5% in Q2 and Q3 and then rise slightly to 2.7% in Q4/2018. Furthermore, they expect it to measure 2.6% in one year’s time and 2.7% in two years’ time and to average 2.6% over the next five and ten years. The survey also indicates that respondents expect the EURISK exchange rate to be 125 in one year’s time; i.e., they expect the króna to be slightly weaker in May 2019. In the last three surveys, they expected the króna to be virtually unchanged one year ahead.
Based on the median response, respondents expect the Bank’s key rate to be held unchanged at 4.25% for the next two years, as they did in the last survey. At the time the survey was conducted, about 81% of respondents considered the monetary stance appropriate, as compared with 68% in the last survey. About 19% of respondents considered the monetary stance too tight or far too tight, as compared with 18% in the January survey. No participants considered the monetary stance too loose or far too loose, whereas in the last survey the share was 14%.
In this survey, the range of responses concerning market agents’ expectations about Central Bank interest rates had narrowed from the January survey, particularly for short-term expectations. The range of responses regarding short-term inflation expectations was also somewhat narrower than in the last survey, whereas, it was virtually unchanged for long-term expectations.
In the survey, market agents were asked what they considered to be the main reason why the commercial banks’ indexed covered bond yields have not fallen as much as comparable Treasury and HFF bonds since mid-2017. Nearly half of the respondents were of the view that the relatively greater supply of covered bonds was the main reason, but they also mentioned the homogeneity of the group of investors in covered bonds, reduced demand from pension funds in the recent term, and the Central Bank’s special reserve requirement.

Further information on survey of market expectations here: Survey of market expectations