Survey of market expectations
The Bank’s market expectations survey was carried out between 9 and 11 August 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 18 market participants, giving a response ratio of 60%.
The survey findings suggest that market agents’ short- and long-term inflation expectations are broadly similar to the findings from the Bank’s May survey. According to the median response in this survey, participants expect inflation to measure 1.8-2.0% in 2017 and then rise to an average of 2.1-2.5% each quarter in 2018. They expect it to measure 2.5% in two years’ time and to average 2.5-2.6% over the next five and ten years. On the whole, inflation expectations declined by up to 0.1 percentage points between surveys. Furthermore, the survey indicates that respondents expect the EURISK exchange rate to be 125 in one year’s time and 127 in two years’ time; i.e., they expect it to remain virtually unchanged in the near term, whereas in previous surveys they have usually expected an appreciation.
Based on the median response, market agents expect the Bank’s interest rates to be lowered by 0.25 percentage points in Q3/2017, which corresponds to a reduction in the key rate from 4.5% to 4.25%, and they expect it to remain unchanged for the next two years. These are lower interest rates than they indicated in the May survey.
At the time the survey was conducted, about 67% of respondents considered the monetary stance appropriate, compared to 43% of respondents in the last survey. The percentage that considered the monetary stance too tight or far too tight fell from 57% in the May survey to 28% in this survey. Roughly 6% considered the monetary stance too loose or far too loose.
In this survey, the range of responses concerning market agents’ expectations about Central Bank interest rates was narrower than in the May survey, whereas the interquartile range was a little wider. The distribution of responses on average inflation expectations was similar to that in the May survey, but the range of responses regarding one and two year inflation expectations had narrowed somewhat between surveys.