Survey of market expectations
The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 4-6 November 2024. A total of 39 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 31 market participants, giving a response ratio of 79%.
Highlights
The findings suggest that market agents’ inflation expectations have fallen since the Bank’s August survey. Respondents expect inflation to measure 3.5% in one year and 3.4% in two years, as compared with 4.3% and 4%, respectively, in the last survey. They expect inflation to average 3.3% over the next five years and 3% over the next ten, which is around ½ a percentage point less than in August. The survey indicates that market agents expect the króna to depreciate slightly in the coming term, with the EURISK exchange rate measuring 150 in one year’s time.
According to the median response, market agents expect the Central Bank’s key interest rate to keep falling, to 8.5% at the end of Q4/2024, 6.75% in one year, and 5.75% in two years. This is a lower key rate than they expected at the time of the last survey, but relatively close to their responses in the April survey.
Survey participants’ responses on the monetary stance changed markedly between surveys. About 87% of them considered the stance too tight, up from 52% in the August survey. About 13% considered the monetary stance appropriate, down from 40% in August, and none considered it too loose.
The range of responses on interest rates was considerably narrower by nearly all measures than in the last survey. The range of responses on inflation was narrower than in August for horizons of one year and longer.
Participants were also asked if they expected inflation to be above the Bank’s 2.5% target, on average over the next ten years, to state the main reason for their opinion. Various reasons were given, but about half of respondents mentioned wage rises or developments in the labour market, while nearly 40% mentioned fiscal policy and a fifth specified house price inflation due to, among other things, population growth. Several participants also noted that the real exchange rate was high, which could cause the nominal exchange rate to fall.
See here data on market expectations: Survey of market expectations, Q4/2024.
A special site for information on surveys of market expectations is here: Survey of market expectations.