12 May 2021

Survey of market expectations

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 3 through 5 May. 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 26 market participants, giving a response ratio of 90%.


The survey findings indicate that market agents expect inflation to average 4.3% in Q2/2021 and then ease to an average of 3.6% in Q3 and 3.3% in Q4. They also expect inflation to continue easing in H1/2022 and measure 3% a year from now. This is a higher inflation rate than in the survey taken in January, when respondents expected inflation to peak at 3.7% in Q1/2021 and then taper off, aligning with the Bank’s 2.5% inflation target in Q1/2022. Expectations two, five, and ten years ahead are still at target and are unchanged since the last survey. The survey indicates that respondents expect the króna to appreciate in the coming term, with the EURISK exchange rate measuring 145 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 0.75% in Q2/2021 and then rise to 1% in Q3 and 1.25% by the year-end. They also expect the key rate to measure 1.5% in one year and 1.75% in two years. This is higher than in the survey from January, when they expected the key rate to be 0.75% at the end of 2021 and 1% in two years’ time.

Market agents’ opinion of the monetary stance has changed somewhat since the last survey. At present, 44% of survey participants consider the monetary stance too loose, up from 15% in January. On the other hand, no participant considers it too tight at the moment, down from 38% in the last survey. As before, most respondents consider the monetary stance appropriate, or just over half of survey participants.

The range of responses on inflation expectations regarding the next four quarters was broadly unchanged from the previous survey, whereas it was wider for expectations two and five years ahead. The range of responses on interest rate expectations was wider than in the last survey, particularly the overall range, whereas the interquartile range widened less markedly. The range of responses on the exchange rate outlook widened between surveys as well.

Survey participants were also asked what they thought were the main reasons corporate lending had not been stronger in the recent term. Two of every three respondents cited uncertainty about the economic outlook and near-term operating conditions as the main reasons why businesses have not borrowed more, and one-third said firms lacked investment opportunities or had no need for further investment because their current capacity was sufficient to meet demand. Furthermore, just over a fourth said that credit spreads on corporate loans were too high.

More here: Survey of market expectations.