30.10.2019

Survey of market expectations

Central Bank of Iceland

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 21 through 23 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 25 market participants, giving a response ratio of 89%.

Highlights

The survey findings suggest that market agents’ short-term inflation expectations have fallen since the Bank’s mid-August survey. Their long-term inflation expectations are virtually unchanged from the previous survey. According to the median response in this survey, participants expect inflation to measure 2.6% in Q4/2019, 2.4% in Q1/2020, and 2.2% in Q2/2020. They also expect inflation to measure 2.4% one year ahead and 2.5% two years ahead. Furthermore, they expect inflation to average 2.5% in the next five and ten years. Market agents’ five-year inflation expectations are unchanged from the August survey, while their ten-year expectations have fallen by 0.1 percentage points. Their long-term inflation expectations are about ½ a percentage point lower than they were a year ago. The survey also indicates that respondents expect the króna to remain broadly stable in the coming term, with the EURISK exchange rate measuring 139 in one year’s time.

According to the median response in this survey, market agents expect the Central Bank’s key rate to fall by 0.25 percentage points, to 3%, in Q1/2020. They expect the key rate to remain unchanged through 2020 and then fall slightly thereafter. This is a lower key rate than they expected in August, when they expected it to measure 3.25% over the next two years.

A majority of respondents consider the monetary stance too tight at present, just as in the Bank’s previous two surveys. The share who consider the monetary stance too tight has declined between surveys, however, from 74% in August to 56% in this survey. The share who consider the monetary stance appropriate has risen accordingly, from 22% to 40%.

In this survey, the range of responses on inflation expectations widened in comparison with the last survey. The range of responses on near-term inflation widened marginally, but the range of responses on longer-term inflation was even wider. The interquartile range (between the first and third quartiles) was similar to that in the previous survey. Relative to the previous survey, the range of responses on interest rates was narrower when the question centred on the current quarter, but wider when the question centred on interest rates in 2020. The range of responses about the exchange rate outlook widened slightly relative to the previous survey but is narrower than in the October 2018 survey.

In this survey, market agents were also asked how effectively they thought Central Bank interest rate cuts in 2019 had been transmitted to rates offered to households and businesses. As regards rates offered to households, respondents fell into two broadly equal camps: those that thought the rate cuts have been transmitted effectively, and those that thought they have not. On the other hand, four out of every five respondents were of the opinion that the rate cuts have not been transmitted effectively to rates offered to businesses.

See the survey here: Survey of market expectations in Q4 2019

See further information on the survey of market expectations here: Survey of market expectations

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