21.08.2019

Survey of market expectations

Central Bank of Iceland

The Central Bank of Iceland conducted its survey of market agents’ expectations during the period 12-14 August 2019. 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 24 market participants, giving a response ratio of 86%.

Highlights

The survey findings suggest that market agents’ short-term inflation expectations have fallen since the Bank’s mid-May survey. Their long-term expectations have also fallen relative to the previous survey. According to the median response in this survey, participants expect inflation to measure 3.2% in Q3/2019, 3% in Q4, and 2.9% in Q1/2020. They also expect inflation to measure 3% one year ahead and 2.5% two years ahead. Furthermore, they expect inflation to average 2.5% in the next five years and 2.6% in the next ten years. Five- and ten-year expectations are therefore lower than in the Bank’s May survey. The survey also indicates that respondents expect the króna to remain broadly stable in the coming term, with the EURISK exchange rate measuring 138 in one year’s time.

According to the median response in this survey, market agents expect the Central Bank’s key interest rate to be lowered by 0.25 percentage points, to 3.5%, in Q3/2019, and by an additional 0.25 percentage points before the end of this year. Thereafter, they expect the key rate to remain unchanged at 3.25% in one and two years’ time. This is a lower interest rate than they expected in the Bank’s May survey.

As in the last survey, a majority of respondents consider the monetary stance too tight at present. As before, three out of every four consider the monetary stance too tight or far too tight, although the share considering it far too tight was 20 percentage points lower than in the previous survey.

In this survey, the range of responses on inflation expectations narrowed in comparison with the last survey. The gap between the first and third quartiles narrowed for the short term but widened slightly for the long term. The range of responses on market agents’ expectations concerning interest rates was also narrower than in the last survey, for both the short and the long term. Participants’ responses concerning their interest rate and inflation expectations lay in a generally lower range than in the May survey.

In addition, participants were asked how they expected real estate market prices and turnover to develop in the next twelve months. They expect little change in real house prices in the coming year, and they anticipate unchanged or slightly reduced turnover in the market.

Survey of market expectations

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