Survey of market expectations
The Bank’s market expectations survey was carried out between 30 October and 1 November 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 23 market participants, giving a response ratio of 77%.
The survey findings suggest that market agents’ short- and long-term inflation expectations are broadly similar to the findings from the Bank’s August survey. According to the median response in this survey, participants expect inflation to measure 1.9% in Q4/2017 and then rise to 2.0-2.2% in the first half of 2018, a decline of 0.1-0.2 percentage points between surveys. Furthermore, market agents expect inflation to measure 2.5% in one and two years’ time and to average 2.5-2.6% over the next five and ten years, as they did in August. The survey indicates that respondents expect the EURISK exchange rate to be 123 in one year’s time and 125 in two years’ time; i.e., they expect it to remain virtually unchanged in the near term. This is a slight change from the previous survey, conducted in August, whereas, in the surveys carried out previously, respondents had generally assumed a further appreciation.
Based on the median response, market agents expect the Bank’s interest rates to remain unchanged this and next year but to rise by 0.25 percentage points in two years’ time. If these expectations are borne out, the Bank’s key interest rate will remain 4.25% until end-2018 and then rise to 4.5% in 2019. In the August survey, respondents expected the key rate to remain 4.25% through 2019.
At the time the survey was conducted, about 59% of respondents considered the monetary stance appropriate, compared to 67% of respondents in the last survey. The percentage that considered the monetary stance too tight or far too tight was 27%, roughly the same as in the August survey. About 14% considered the monetary stance too loose or far too loose, compared to 6% in the last survey.
In this survey, the range of responses concerning market agents’ expectations about Central Bank interest rates was wider than in the August survey, whereas the interquartile range was similar. The distribution of responses on average inflation expectations was similar to that in the August survey, but the range of responses regarding inflation in 2018 had narrowed somewhat between surveys.