Survey of market expectations
The Central Bank of Iceland’s market expectations survey was carried out on 21-23 January. 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 21 market participants, giving a response ratio of 75%.
The survey findings suggest that market agents’ short- and medium-term inflation expectations have fallen since the Bank’s late-October survey. According to the median response in this survey, participants expect inflation to measure 3.6% in Q1/2019, rise to 3.7% in Q2, and remain there for the rest of the year. They also expect inflation to measure 3.5% one year ahead and 3% two years ahead. Furthermore, respondents expect inflation to average about 2.8% in the next five and ten years. This is 0.2 percentage points less than in the Bank’s October survey but 0.2 percentage points more than in the survey taken a year ago. The survey also indicates that respondents expect the EURISK exchange rate to be 138 in one year’s time, which entails a slight weakening of the króna from the time the survey was conducted.
According to the median response in this survey, market agents expect the Central Bank’s key rate to remain unchanged at 4.5% in Q1/2019, followed by a rate hike of 0.25 percentage points, to 4.75%, in Q2. They expect the key rate to be 4.75% one year from now, but that they will have been lowered to 4.5% after two years. In this survey, 24% of respondents considered the monetary stance too loose or far too loose at present, which is a smaller share than in the last survey. About 57% of respondents considered the monetary stance appropriate, as compared with 48% in the last survey. The share who considered the monetary stance too tight or far too tight measured 19%, up from 12% in the October survey.
In this survey, the range of responses concerning market agents’ expectations about Central Bank interest rates and the inflation outlook narrowed in virtually all areas relative to the previous survey.
See further information here: Surveys of market expectations