Citi analyst David Lubin says that the process leading to yesterday's approval of the 2009-2010 budget by the cabinet strengthens his conviction that interest rates will rise by the end of the year.
Lubin finds that while the actual budget figures are not much worse than expected, with a deficit target of 6% of GDP in 2009 and 5.5% in 2010, there is concern that the approval process reflected tension between, as he put it, "the fiscal 'hawks' in Likud and the finance ministry;" and "the 'doves' of Histadrut (Israel's trade union federation)."
The analyst predicts that the Bank of Israel will not be pleased with the real increase in public spending rising 3%, over the generally accepted rule of not rising more than 1.7%. "Although the Bank of Israel has argued in the past that it would be supportive of a relaxation in the 1.7% fiscal rule, this was only in the context of a declining debt to GDP ratio. Since it seems clear that the debt to GDP ratio will be on the increase in the next couple of years, the Bank is unlikely to welcome the change."
Lubin is not convinced that the VAT increase will necessarily lead to inflationary pressures, noting that the increase may be partly offset by an increase in the ceiling on salaries liable to national insurance payments.
However, he points to the entire budget approval process and the resignation of Treasury budget director Ram Belinkov, and says that as it seems to indicate a victory for Labor, he concludes, "On balance, then, our view that rates might need to rise by year-end seems to be reinforced."
Published by Globes [online], Israel business news - www.globes-online.com - on May 14, 2009
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