Market expectations survey
The Bank’s market expectations survey was carried out between 30 January and 1 February. A total of 30 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 17 market participants, giving a response ratio of 57%.
The survey findings suggest that market agents’ inflation expectations one year ahead have risen marginally since the Bank’s November survey, while their long-term expectations have fallen slightly. According to the median response in the survey, respondents expect inflation to measure 1.9% in the first half of 2017 and then rise slightly, to 2.3% in the first quarter of 2018. They expect it to measure 2.8% in two years’ time and to average 2.7% over the next five and ten years, which is 0.2 percentage points lower than they expected in the last survey. Furthermore, the survey indicates that respondents expect the EURISK exchange rate to be 120 in one year’s time; i.e., they expect the króna to be nearly 3% weaker than in the last survey.
According to the median response, market agents expect the Bank’s interest rates to be lowered by 0.25 percentage points in the first half of 2017, which corresponds to a reduction in the key rate from 5% to 4.75. Survey participants also expect the key rate to be raised again to 5% at the beginning of 2018 and then remain unchanged for throughout the forecast horizon. These are slightly lower rates than respondents expected according to the November survey.
At the time the survey was conducted, about 41% of respondents considered the monetary stance appropriate. This is roughly 15 percentage points higher than in the last survey. The percentage that considered the monetary stance too tight or far too tight fell by 7 percentage points, to 53%. The share that considered it too loose or far too loose declined as well, from 13% to 6%.1
The total range of responses was narrower in market agents’ expectations concerning the Bank’s interest rates in this survey as compared with the November survey, whereas the interquartile range is broadly similar between surveys. A similar thing can be said of the distribution of responses on developments in inflation, where the overall distribution of responses was considerably wider than in the last survey.
In the February survey, market agents were asked what they consider an appropriate Central Bank key rate at present. Although responses ranged between 3.5% and 5.5%, most respondents were of the view that the key rate should lie in the 4.75-5% range; i.e., at the current level or 0.25 percentage points below it, whereas just under a fifth considered 4.5% appropriate.