The Central Bank of Iceland published its Q1 2025 survey of bond market participants’ expectations, indicating broadly unchanged short-term inflation expectations since the November survey while long-term inflation expectations have risen. Respondents expect inflation to continue falling to 3.6% in one year and 3.3% in two years, averaging 3.4% over the next five years, while ten-year average inflation expectations increased to 3.4% from 3% previously. The median expectation continues to be for the key interest rate to decline to 7.75% at end-Q1 2025, 6.75% after one year, and 5.75% after two years, unchanged from the prior survey. Participants also expect the króna to depreciate, with the EURISK exchange rate seen at 150 in one year; 80% judged the monetary stance too tight (down from 87%), 20% considered it appropriate (up from 13%), and none viewed it as too loose. The Central Bank received 30 responses from 39 invited market agents (a 77% response ratio). Inflation forecasts showed a narrower dispersion than in November, while interest-rate expectations widened by most measures, and views on housing were mixed with half expecting lower turnover and split expectations on real house prices over the next 12 months.
Central Bank of Iceland 2025-01-29
Central Bank of Iceland survey shows steady near-term inflation expectations and markets still pricing continued key rate cuts
The Central Bank of Iceland's Q1 2025 survey reveals stable short-term inflation expectations but an increase in long-term expectations, with inflation projected to fall to 3.6% in one year and 3.3% in two years. The key interest rate is expected to decline to 7.75% by end-Q1 2025, while 80% of respondents view the monetary stance as too tight, and the króna is anticipated to depreciate against the euro.