Survey of market expectations
The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 22 through 24 January. A total of 37 agents in the bond market, including banks, pension funds, mutual and investment funds, securities brokers, licensed asset management firms, and insurance firms were invited to participate. Responses were received from 26 market participants, giving a response ratio of 70%.
The survey findings indicate that market agents expect inflation to average 6.9% in Q1/2024. They expect inflation to keep easing in the coming term, to 5.3% in one year’s time, whereas in the last survey they expected it to measure 5.5% one year ahead. They expect inflation to measure 4.4% two years from now, which is higher than in the previous survey.
Long-term inflation expectations also increased between surveys. Market agents expect inflation to average 4.1% over the next five years and 3.8% over the next ten. The survey indicates that respondents expect the exchange rate of the króna to remain broadly unchanged in the coming term, with the EURISK exchange rate measuring 148 one year from now.
According to the median response in this survey, market agents assume that the Central Bank’s key rate has peaked at 9.25%. They expect it to start falling in Q2/2024, to 7.75% in one year’s time and 5.75% after two years. This is a lower interest rate than market agents expected at the time of the last survey.
Survey participants’ responses on the monetary stance changed between surveys. About 42% of respondents considered the monetary stance appropriate at present, down from 60% in the November survey. On the other hand, the share who considered the current monetary stance too tight rose to 42% from the previous 27%. About 15% of survey participants considered the monetary stance too loose.
By most measures, the distribution of responses on inflation widened between surveys. The distribution of responses on interest rate expectations narrowed in terms of expectations three and four quarters ahead, but it widened marginally for other horizons.
Market agents were also asked what impact they think new wage agreements will have on inflation in the next two years. Half of them said their expectations were unchanged, 35% reported that they expected inflation to ease more slowly as a result of the wage agreements, and 15% said they thought inflation would fall more rapidly.
See here data on market expectations:
A special site for information on surveys of market expectations is here: Survey of market expectations.