Citigroup says that the Bank of Israel “will probably not need to raise rates aggressively in coming quarters,” as inflation expectations drop as the shekel strengthens. However, the bank still expects the interest rate to reach 4.5% in 12 months.
Citigroup analyst Jean-François Mercier writes today that, “The Bank of Israel's monthly report on inflation expectations confirmed that market-based expectations (and, to a lesser extent, those of the economists' consensus) remain strongly influenced by foreign exchange moves, and eased in the past month and a half as the shekel reversed earlier weakness against the US dollar. Breakeven inflation expectations one year ahead fell from 1.9% year-on-year in July to 1.7% in August and 1.4% in the last 30 days; for the two years ahead, they fell from 2.5% to 2.1% and then 1.8% (expectations for three years ahead were stable at 2.5%). Meanwhile, the consensus of economists downgraded its inflation projection for the next 12 months to 2.1% year-on-year, from 2.6% in August. Thus, both the consensus and markets now clearly believe that the Bank of Israel can hold inflation close to the 1-3% target's midpoint.
“Since inflation expectations have always been an input in the Bank of Israel's decision-making process, their recent decline is another indication that the central bank will probably not need to raise rates aggressively in coming quarters. This does not mean that rates will not rise further - they are still low in both nominal and real terms, and in any case, the market also expects that they will go up further (for example, three-year yields now stand at 5.15%, about 120 basis points above May’s lows). But with the shekel firm, they may not need to rise as much as in the previous cycle. And as we regard the recent decline in inflation expectations as justified this suggests that current bond yields, especially versus the US, are rather attractive.”
Published by Globes [online], Israel business news - www.globes.co.il - on September 18, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007