Survey of Market Expectations 2026 05 12

Survey of market expectations survey of market expectations monetary policy Listen

The Central Bank of Iceland conducted a survey of market agents’ expectations over the period from 4 through 6 May. A total of 38 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 26 market participants, giving a response ratio of 68%.

Highlights

The survey results indicate that market agents expect higher inflation in the coming year than they did in the January survey; however, they expect inflation to ease relatively quickly at the start of next year. Based on the median response, survey participants expect inflation to measure 3.9% in one year’s time, or 0.2 percentage points higher than in the previous survey. Their longer-term expectations are unchanged since January, however, and they expect inflation to measure 3.1% in two years, 3.2%, on average over the next five years, and 3%, on average, over the next ten years. Furthermore, they expect the exchange rate of the króna against the euro to be about the same in one year as it was when the survey was conducted.

Market agents expect the Central Bank’s key interest rate to be rather higher than they did at the time of the January survey. Based on the median response, they expect the key rate to be raised by 0.25 percentage points in Q2/2026, to 7.75%, whereas in the last survey they expected it to be 7%. Respondents assume that the key rate will remain unchanged for the rest of this year and then begin to fall in Q1/2027. They expect the key rate to be 6% in two years’ time, whereas in the last survey they expected it to measure 5.75%.

The share of respondents who considered the monetary stance too loose was 27%, up from 10% in the previous survey, in spite of the Central Bank’s rate hike in March. On the other hand, the share who considered the stance too tight declined between surveys, from 55% in the January survey to 42% in this one. Similarly, the share who considered the monetary stance appropriate fell from 35% in January to 31% in this survey.

The overall range of responses on one- and two-year inflation expectations narrowed between surveys, while for other horizons it widened. Relative to the last survey, the overall range of responses on developments in the key rate widened for expectations over the next three quarters, while it narrowed for expectations two years ahead.

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 2.5%, and the standard deviation was 0.44 percentage points. Respondents have been asked this question four times in the past. In May 2023 the median response was 1.9%, in August 2020 it was 1%, in May 2019 it was 1.25%, and in August 2014 it was 3%.

Survey of market expectations - May 2026.
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