Merrill Lynch says that although the Bank of Israel kept the interest rate unchanged at 0.5% yesterday, inflationary pressures and an apparently recovering economy will force it to raise rates as early as December.
Merrill Lynch analysts expect the interest rate to reach 1.5% by the end of 2010.
The analysts point to two money supply figures, M1 and M2, which rose by 54% year on year and 18%, respectively. They add that with the expected approval of the budget, fiscal spending is likely to surge, pushing 2010 inflation expectations higher.
Merrill Lynch expect GDP to post a 2.0% contraction this year and 1.8% growth in 2010.
The analysts say that the Bank of Israel has been one of the most proactive central banks with regard to monetary easing, and they expect it to be one of the first banks to hike rates. "Given the highly volatile nature of inflation, the expected recovery in economic activity in H2 2009 and the wall of issuance expected later this year on the back of surging budget deficit, it will not be surprising to see the first hike as early as December 2009."
Merrill Lynch was bought by Bank of America in 2008 and is now a wholly-owned subsidiary of the bank.
Published by Globes [online], Israel business news - www.globes-online.com - on June 23, 2009
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