19 August 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 10 through 12 of August. A total of 29 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 86%.


The survey results indicate that market agents expect inflation to be above the Central Bank’s inflation target through this year which represents an increase from the May survey. They expect inflation to approach the target again in H1/2021, however. According to the median response in this survey, participants expect inflation to measure just under 3% in Q3/2020, 2.9% in Q4, and 2.75% in Q1/2021. Expectations one, two, five, and ten years ahead were unchanged since the last survey, however, at 2.5%. Market agents’ long-term inflation expectations have therefore been at target for a year. The survey indicates that respondents expect the króna to appreciate slightly in the coming term, with the EURISK exchange rate measuring 160 in one year’s time.

According to the median response in this survey, market agents expect the Central Bank’s key rate to remain unchanged at 1% in Q3/2020, and then fall by 0.25 percentage points in Q4/2020. Thereafter, they expect the Bank’s key rate to remain unchanged until Q3/2021. Furthermore, they expect the key rate to be 0.75% in two years. This is a lower rate than survey participants expected in May, when they projected that the Bank’s key rate would bottom out at 1% in Q4/2020 and then begin to rise in H1/2021.

Nearly half of respondents consider the monetary stance appropriate at present. This is a change from the last five surveys, in which most respondents considered the monetary stance too tight. The share who consider the monetary stance too tight has declined considerably between surveys, from 70% in May to 28% in this survey. In addition, the share who consider the monetary stance too loose has risen from 11% to 23%.

In this survey, the overall range of responses on inflation expectations was slightly narrower than the last survey, whereas the interquartile range was about the same. The overall range of responses on interest rate expectations also narrowed. The range of responses on the exchange rate outlook both one and two years ahead narrowed between surveys as well.

Respondents were also asked what long-term real interest rate they considered appropriate to align output with long-term potential output and keep inflation at target. The median response was 1%, and the standard deviation was 0.73 percentage points. For comparison, when the same question was asked in the May 2019 and August 2014 surveys, the median responses were 1.25% and 3%, respectively.

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