13 May 2020

Survey of market expectations

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 4 through 6 May. 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 27 market participants, giving a response ratio of 96%.

The survey findings suggest that market agents’ inflation expectations are still at the Bank’s inflation target and are therefore broadly unchanged since the Bank’s January survey. According to the median response in this survey, participants expect inflation to measure 2.2% in Q2/2020 and 2.4% in both Q3 and Q4/2020. Market agents’ inflation expectations one, two, five, and ten years ahead were virtually unchanged since the last survey, at 2.5%. The survey indicates that respondents do not expect the króna to depreciate further in the coming term, and that they expect the EURISK exchange rate to measure 160 in one year’s time. 

According to the median response in this survey, market agents expect the Central Bank’s key rate to fall by 0.5 percentage points, to 1.25%, in Q2/2020, and by another 0.25 percentage points before the end of 2020. Respondents expect the key rate to rise again next year, to 1.25% in Q2/2021. Furthermore, they expect the key rate to be 1.75% in two years. This is lower than in the January survey, which was taken before the COVID-19 pandemic spread all over the globe. In that survey, respondents expected the key rate to measure 2.75% over the next two years.

A majority of respondents consider the monetary stance too tight at present, as in the Bank’s previous four surveys. The share who consider the monetary stance too tight has risen between surveys, from 61% in January to 70% in this survey. In addition, the share who consider the monetary stance too loose has risen from 4% to 11%. The share who consider the monetary stance appropriate has fallen accordingly, from 35% to 19%.

In this survey, the overall range of responses on inflation expectations was considerably wider than in the last survey, whereas the interquartile range was about the same. The overall range of responses on interest rate expectations also widened significantly. The range of responses on the exchange rate outlook both one and two years ahead widened between surveys as well.

In addition, market agents were asked what impact they thought the Central Bank’s quantitative easing programme would have on the bond market. Most of them said they expected the QE programme to increase bond market turnover and liquidity and to lower bond yields. They noted, however, that the impact would depend in part on the volume of Treasury bond issuance in the coming term and on which bonds the Central Bank decided to buy.

See data  here:

Survey of market expectations Q22020.xlsx

Older questions and special questions_2020Q2.xlsx

See further information of market expectations here: Survey of market expectations.