15 May 2019

Survey of market expectations

Central Bank of Iceland

The Central Bank of Iceland conducted its survey of market agents’ expectations on 6-8 May 2019. A total of 28 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 82%.

The survey findings suggest that market agents’ short-term inflation expectations have fallen since the Bank’s late-January survey. Their long-term expectations also fell marginally from the previous survey. According to the median response in this survey, participants expect inflation to measure 3.3% in Q2 and Q3/2019 and then fall to 3% in Q4/2019. They also expect inflation to measure 3% one year ahead and 2.8% two years ahead. Furthermore, they expect inflation to average 2.8% in the next five years and 2.7% in the next ten years. Their five-year expectations are unchanged from the January survey, but their ten-year expectations have fallen marginally. The survey also indicates that respondents expect the króna to depreciate slightly in the coming term, with the EURISK exchange rate measuring 140 in one year’s time.

According to the median response in this survey, market agents expect the Central Bank’s key rate to fall to 4% in Q2/2019 and remain unchanged through Q1/2020. They expect another rate cut in Q2/2020 and project that the key rate will be 3.75% in one and two years’ time.

Participants’ responses concerning the monetary stance have changed markedly in this survey: no one considered the current monetary stance too loose, whereas nearly a fourth of respondents were of that opinion in the last survey. About a fourth of respondents considered the monetary stance appropriate, as compared with 57% in the last survey. On the other hand, over half of respondents considered the current monetary stance too tight, as opposed to 19% in the January survey. Nearly one-fourth considered it far too tight, whereas no respondents were of that opinion in the January survey.

In this survey, the range of responses concerning market agents’ inflation expectations was similar to that in the last survey. The overall range of responses concerning interest rate expectations widened in comparison with the previous survey, while the gap between the first and third quartiles was broadly unchanged or narrower, particularly for the short term. Participants’ responses concerning their interest and inflation expectations lay in a generally lower range than in the January survey.

Respondents were also asked what long-term real interest rate they considered appropriate to align output with long-term potential output and keep inflation at target. The median response was 1.25%, and the standard deviation was 0.36 percentage points. For comparison, it is worth noting that when the same question was asked in the August 2014 survey, the median response was 3%.

Survey of market expectations