02 February 2022

Survey of market expectations

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 24 through 26 January. 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 5% in Q1/2022 and then ease in coming months to 4.7% in Q2/2022. They also expect it to continue easing thereafter and measure 3.8% a year from now. This is higher inflation than market agents expected in the survey from November, when they expected it to average 4.4% in Q1/2022. Inflation expectations two and five years ahead have risen since the last survey and now measure 3%. Ten-year expectations have risen as well, to 2.75%. The survey indicates that respondents expect the króna to appreciate in the coming term, with the EURISK exchange rate measuring 140 in one year’s time.

Based on the median response, market agents expect the Central Bank’s key interest rate to rise to 2.5% in Q1/2022, followed by rate hikes of 0.25 percentage points in the three quarters to follow. They expect it to measure 3.5% one year from now and then remain unchanged for the year thereafter. This is higher than in the survey from November, when they expected the key rate to be 2.5% after one year and 3% in two years’ time.

Participants’ responses on the monetary stance have changed somewhat, and a large majority, 76%, now consider the current stance too loose, up from 56% in November. On the other hand, the share who consider it appropriate fell to 20%, from 44% in the last survey. Only 4% of respondents consider the monetary stance too tight.

The range of responses on inflation expectations was virtually the same as in the previous survey as regards inflation both in the next three quarters and ten years ahead, while the range of responses on expectations one, two, and five years ahead was wider. The range of responses on interest rate expectations in coming quarters was narrower than in the previous survey.

In this survey, market agents were asked about developments in wages. They expect wage rises in the upcoming round of negotiations to be smaller than in the current one. Based on the median response, they assume that the wage index will rise by an average of 5% per year in the coming round of negotiations, while the mean response was somewhat higher, or 5.5%. The range of responses was wide, from 3% to 10%, reflecting significant uncertainty about the outcome of the next wage agreements.

See here an Excel-file with the results: Survey of market expectations - Q1 - 2022 (minor correction)