29 January 2020

Survey of market expectations

Central Bank of Iceland

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 20 through 22 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 24 market participants, giving a response ratio of 86%.

The survey findings suggest that market agents’ inflation expectations are broadly unchanged since the Bank’s October survey. According to the median response in this survey, participants expect inflation to measure 2.1% in Q1/2020 and 2.2% in both Q2 and Q3/2020. They expect inflation to measure 2.4% in one year and 2.5% in two years, as in the previous survey. Their long-term inflation expectations are also unchanged from the previous survey, and respondents continue to expect inflation to average 2.5% over the next five and ten years. The survey indicates that respondents expect the króna to depreciate slightly in the coming term, with the EURISK exchange rate measuring 140 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 2.75%, in Q1/2020, and then remain unchanged for the two years thereafter. This is a lower rate than in the October survey, when they expected it to measure 3% over the next two years.

A majority of respondents consider the monetary stance too tight at present, as in the Bank’s previous three surveys. The share who consider the monetary stance too tight has risen between surveys, from 56% in October to 61% in this survey. The share who consider the monetary stance appropriate has fallen accordingly, from 40% to 35%.

In this survey, the overall range of responses on inflation expectations narrowed in comparison with the last survey, whereas the interquartile range was about the same. The range of responses on interest rate expectations was also narrower than in the previous survey, particularly on interest rates one and two years ahead. The range of responses on the exchange rate outlook one year ahead was virtually unchanged from the previous survey, whereas it narrowed for the two-year exchange rate outlook.

In addition, market agents were asked to cite the factors they considered most likely to cut into corporate investment at present. Access to capital and cost of capital were mentioned most often, with 60% of respondents stating that firms had insufficient access to capital and 55% considering financing costs too high. About half of survey participants cited economic uncertainty as a drag on firms’ willingness to invest, while 15% said wage costs were too high and 10% thought more public investment was needed.

Survey of market expectation survey

Older questions and special questions

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