17 May 2023

Survey of market expectations

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 8 through 10 May. A total of 39 agents in the bond market, including banks, pension funds, mutual and investment funds, securities brokers, licensed asset management firms, and insurance firms were invited to participate. Responses were received from 31 market participants, giving a response ratio of 79%.

The survey findings indicate that market agents expect inflation to average 9.4% in Q2/2023. They expect it to continue falling, to 6.3% one year from now and 4.5% after two years. This is a higher inflation rate than they indicated in the January survey. Long-term inflation expectations also increased between surveys. Market agents expect inflation to average 4% over the next five years and 3.5% over the next ten. The survey indicates that respondents expect the exchange rate of the króna to remain broadly unchanged in the coming term, with the EURISK exchange rate measuring 150 both one and two years ahead.

According to the median response in this survey, market agents expect the Central Bank’s key rate to rise by 1 percentage point in Q2/2023, to 8.5%. They expect it to start falling in Q1/2024, to 8.25% in one year’s time and 6% after two years. This is a higher interest rate than market agents expected at the time of the January survey.

Participants’ responses on the monetary stance changed considerably, and most respondents, or 66%, considered the current stance too loose, up from 28% in the last survey. On the other hand, the share who considered it appropriate fell to 17%, from 56% in the previous survey. Roughly 17% of respondents considered the monetary stance too tight.

By most measures, the range of responses on inflation narrowed relative to the January survey, although it widened marginally for expectations in Q2/2023, two years ahead, and over the next five years. However, the range of responses on interest rates was considerably wider than in the last survey.

Market agents were also asked to estimate the equilibrium real interest rate; i.e., they were asked what domestic real interest rate would, in the long run, align output with long-term potential output and keep inflation at the Central Bank’s inflation target. The median response was 1.9%, and the standard deviation was 0.6 percentage points. This was the fourth time survey participants were asked this question. In August 2014, their median response was 3%, in May 2019 it was 1.25%, and in August 2020 it was 1%.

See here data on market expectations:

Survey of market expectations - Q2/2023

A special site for information on surveys of market expectations