05 February 2015

Market expectations survey

Central Bank of Iceland

The Bank’s market expectations survey was carried out on 29-30 January. A total of 34 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 20 market participants, giving a response ratio of 59%.

The results of the January survey indicate that market participants’ short-term inflation expectations have fallen markedly since the October survey but that long-term expectations are broadly unchanged. According to the median response, survey participants expect annual inflation to average 0.8% in Q1/2015 and 1% in Q2/2015. This is just under 1.5 percentage points lower than in the Bank’s October survey. The survey also suggests that respondents’ inflation expectations one year ahead have fallen by 0.2 percentage points, to 2.6%. The findings show as well that respondents project twelve-month inflation at 3% both in two years’ time and as an average over the next five years, as they did in October. Expectations concerning average inflation over the next ten years fell by 0.2 percentage points between surveys and are now 3% as well. Moreover, the survey indicates that respondents expect the EURISK exchange rate to be 152 in one year’s time, which means that they expect the króna to be 1½% stronger than in the last survey.

According to the median response, market participants expect the Central Bank’s collateralised lending rate to be reduced by 0.25 percentage points in the first quarter of 2015 and then raised by the same amount in Q4, to 5.25%, and they expect it to be 5.5% in two years’ time. This is 1 percentage point below their expectations according to the October survey. At the time the survey was conducted, about ¾ of respondents considered the monetary stance too tight or far too tight. This is broadly unchanged from the October survey. Over the same period, the percentage who considered the monetary stance suitable fell slightly, to just over 20%.

In the January survey, respondents were asked to estimate the current inflation uncertainty risk premium in the bond market. According to the median response, they estimate the premium at 0.2 percentage points one year ahead, 0.3 percentage points two years ahead, and 0.5 percentage points five years ahead.

See the market expectations survey here: Market expectations survey Q1/2015 (Excel document)

Further information on the objectives and execution of the market expectations survey can be found here: Informational Report 1.3

See also:  Market expectations survey