The Central Bank of Iceland published a survey showing that market participants expect higher inflation in the coming quarters than in August, but lower inflation one and two years ahead. Respondents also anticipate faster reductions in the key interest rate from the third quarter of 2027, while more consider the monetary stance too tight.
Median inflation expectations fell to 3.7% one year ahead, down 0.2 percentage points from the August survey, and to 3% two years ahead, down 0.5 percentage points. Expectations for the next five years also declined slightly, while expected average inflation over the next ten years remained unchanged at 3%.
The expected interest rate path through mid-2027 was unchanged. Respondents anticipate that the key rate will remain at 8% in the fourth quarter of 2026 before declining from the first quarter of 2027. Faster cuts from the third quarter would bring the rate to 6% in two years, compared with 6.25% in the previous survey. The share judging monetary policy too tight rose to 65% from 50%, while the share considering it too loose fell to 3% from 33%. Separately, most respondents attributed the rise in yields on short and medium term indexed government bonds since early March to expectations of tighter monetary policy than previously anticipated.