Seðlabanki

Survey of market expectations

The Bank’s market expectations survey was carried out on 29-31 October. A total of 28 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 26 market participants, giving a response ratio of 93%.

Highlights

The survey findings suggest that market agents’ short- and long-term inflation expectations have risen since the Bank’s mid-August survey. According to the median response in this survey, participants expect inflation to measure 3.2% in Q4 and then rise to 3.6% in Q1/2019. They expect it to measure 3.8% in Q2 and Q3/2019, and 3.6% in one year’s time. Furthermore, they expect inflation to measure 3.2% in two years, and to average 3% in the next five and ten years. The survey also indicates that respondents expect the EURISK exchange rate to be 140 in one year’s time, which entails a slight weakening of the króna from its current value.

According to the median response, market agents expect the Bank’s key interest rate to rise by 0.25 percentage points in Q4/2018, to 4.5%. They also expect the key rate to rise to 4.75% by the end of Q2/2019 and 5% by the end of Q3, and then remain there through the year-end. In this survey, 40% of respondents considered the monetary stance too loose or far too loose at present, whereas no respondents were of this opinion in the previous survey. About 48% of respondents considered the monetary stance appropriate, as compared with 81% in the last survey. The share who considered the monetary stance too tight or far too tight was 12%, down from 19% in the Bank’s August survey.

In this survey, the range of responses concerning market agents’ expectations about Central Bank interest rates and the inflation outlook widened in virtually all areas relative to the previous survey.

This time, participants were asked what they consider the main driver of the depreciation of the króna since the beginning of September. A large share of respondents mentioned uncertainty about upcoming wage settlements, greater operational difficulties among airlines and tourism operators, and signs of foreign currency accumulation among exporters.