Survey of market expectations
The Bank’s market expectations survey was carried out between 2 and 4 May 2017. 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 22 market participants, giving a response ratio of 73%.
The survey findings suggest that market agents’ short- and long-term inflation expectations have fallen marginally since the Bank’s February survey. According to the median response in the survey, participants expect inflation to measure 1.9-2.0% in 2017 and then rise to 2.2-2.4% in H1/2018. They expect it to measure 2.6% in two years’ time and to average 2.6% over the next five and ten years. On the whole, inflation expectations declined by 0.1-0.3 percentage points between surveys. Furthermore, the survey indicates that respondents expect the EURISK exchange rate to be 111 in one year’s time; i.e., they expect the króna to be more than 5% stronger than it was at the time the May survey was carried out. This is a more pronounced appreciation than they expected in February.
Based on the median response, market agents expect the Bank’s interest rates to be lowered by 0.25 percentage points in Q2/2017, which corresponds to a reduction in the key rate from 5% to 4.75%. They expect a further reduction in Q4 but assume that the key rate will be raised again to 4.75% in Q2/2018. These are lower interest rates than they indicated in the February survey.
At the time the survey was conducted, about 43% of respondents considered the monetary stance appropriate. This is roughly 2 percentage points higher than in the last survey. The percentage that considered the monetary stance too tight or far too tight rose by 4 percentage points, to 57%. No respondents considered the monetary stance too loose or far too loose.
The distribution of responses concerning the Bank’s interest rates was less in this survey than in February, particularly in terms of the interquartile range. The distribution of responses on average inflation expectations five and ten years ahead has also narrowed between surveys, whereas it has widened somewhat for short-term expectations.
In the May survey, market agents were asked whether they expect house prices to rise more rapidly, at the same pace, or more slowly in the near term than they have in the past year. About 60% of respondents indicated that, over the next six months, they expected the twelve-month rise in house prices to be slower than it was in April, when it measured 20%. Others expected the twelve-month increase to keep the same pace. However, 95% of respondents expect the rise in house prices to lose pace in the next year.