The Central Bank of Iceland’s latest survey of market agents – including pension funds, banks, investment funds, brokers, asset managers and insurers – shows inflation expectations edging higher in the short term, with interest rates expected to remain unchanged through the rest of 2025.

The survey, conducted between 11 and 13 August, gathered responses from 28 of 37 invited participants, giving a response rate of 76 per cent.

According to the median response, market agents now expect inflation to measure 3.4 per cent after one year, compared with 3.3 per cent in the May survey.

Inflation is projected at 3 per cent after two years, and at 3 per cent on average over the next five and 10 years.

Respondents forecast the Central Bank’s key interest rate to remain at 7.5 per cent for the rest of the year, contrasting with earlier expectations of a cut.

The rate is expected to fall to 6.75 per cent in one year’s time, higher than agents projected in May. Expectations for two years ahead were unchanged, at 5.75 per cent.

The survey also indicated that market agents expect Iceland’s króna to depreciate in the coming term, with the EURISK exchange rate projected at 145.5 in one year’s time.

Views on the monetary stance were mixed. The proportion of respondents considering policy too tight fell to 43 per cent, down from 64 per cent in May.

A further 43 per cent considered the stance appropriate, while 14 per cent judged it too loose – the first time in recent surveys that any respondents have held this view.

The range of responses on inflation expectations in the final quarter of 2025, and over the next five to 10 years, was wider than in the May survey. By contrast, the spread of responses on interest rate expectations narrowed.

---