10 November 2021

Survey of market expectations

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 1-3 November. 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 findings indicate that market agents expect inflation to average 4.6% in Q4/2021 and then ease next year to an average of 4.4% in Q1/2022 and 3.8% in Q2/2022. They also expect it to continue easing thereafter and measure 3.3% a year from now. This is higher inflation than market agents expected in the survey from August, when they expected it to average 4% in Q4/2021 and fall thereafter. Two-year inflation expectations are broadly unchanged from the last survey, at 2.6%. Ten-year inflation expectations also remain at target. The survey indicates that respondents expect the króna to appreciate in the coming term, with the EURISK exchange rate measuring 143 in one year’s time.

According to the median response in this survey, market agents expect the Central Bank’s key rate to be unchanged at 1.5% at the end of 2021 and then rise by 0.5 percentage points in Q1/2022 and another 0.25 percentage points in Q2. They also expect the key rate to measure 2.5% in one year and 3% in two years. This is higher than in the survey from August, when they expected the key rate to be 2% after one year and 2.25% in two years’ time.

Participants’ responses on the monetary stance have changed somewhat, and a majority, 56%, now consider the current stance too loose, up from 33% in August. On the other hand, the share who consider it appropriate fell to 44%, from 67% in the last survey. As before, no respondents consider the monetary stance too tight.

The range of responses on inflation expectations over the next three quarters was wider than in the previous survey, while the range of responses on expectations one, two, five, and ten years ahead was narrower. The range of responses on interest rate expectations in coming quarters was also wider than in the previous survey, and the range of responses on the exchange rate outlook both one and two years ahead widened between surveys as well.

In this survey, market agents were asked what they consider the key drivers of inflation in the coming twelve months. Most of those who answered this question cited global inflation and rising house prices as the main drivers of domestic inflation in the coming term. In addition, just over a third of respondents mentioned commodity prices and wages, while a smaller share cited supply-chain disruptions and higher shipping costs as important factors. Moreover, roughly half of respondents said they expected a stronger króna to reduce inflationary pressures over the period.

More here: Survey of market expectations - Q4, 2021.