"I think that Governor of the Bank of Israel Prof. Stanley Fischer will be compelled to raise the interest rate, and moreover, he'll be forced to say that he will continue to do so. A year from now, I see the interest rate at 3.5%, at least," Excellence Nessuah chief economist Shlomo Maoz told "Globes TV" today. The Bank of Israel will announce the interest rate for August today.
Maoz added, "By keeping the situation as is, the Bank of Israel will turn into a bubble factory. It's creating a real estate bubble, a stock market bubble, and in fact it's creating a bubble of inflated prices in all kinds of areas where people wouldn’t be buying if the interest rate wasn’t basically zero. The corporate bond market, too, I think that the prices of some bonds are too high. That's why he'll make the change."
"Globes": Can you describe what will happen if Fischer doesn’t raise the interest rate?
Maoz: "If Fischer doesn’t raise the interest rate now, in other words, if he doesn’t take preventative action in time, he'll inflate the markets, and when he'll have to raise the interest rate, he'll have to make a sharp hike. Not the a quarter of a percentage point that he's expected to raise it now, but half a percentage point, three-quarters, or even a full percentage point. That will change the market trend."
Maoz warns, "Such volatility is bad for the market - for the stock market, the bond market, the housing market, and the labor market, because we're reaching high inflation. If Fischer doesn’t raise the interest rate in time, within 15 months from today, we'll have 4% to 6% inflation. By then, inflation will be so bad that it will hurt Israeli society and companies. Companies will fire, instead of hire, employees in 18 months, and we'll reenter a recession or slowdown because of inflation and the sharp rise in companies' financing costs.
"There are firms that are raising money linked to the Consumer Price Index (CPI) and bearing 7% interest. If inflation reaches 4%, the interest will be 11%, which firms will not be able to pay, and they'll have to fire employees to cut costs. If Fischer wants to spare the rod, it's not good. He must raise the interest rate by 25 basis points today in order to avoid a sharper interest rate hike in the future."
Where is the euphoria on the TASE coming from?
"The euphoria on the TASE is coming from the euphoria in the rest of the world. The reason is, like in Israel, the negligible interest rates. The difference between Israel and there is that, overseas, inflation is also negligible in the Western world. I think that the moment that we see a rise in the US growth rate, I expect that in the first quarter of 2010 we'll see a rise in the US and European interest rates. The rises will then ease off. At the moment, the rises are driven by the zero interest rates, so the multiple can ostensibly be infinite. The moment that the interest rate will rise, the trend will change, and then see what will happen to firms - and in which sectors and companies it will be worthwhile to invest in. Then it won't be financial investment, but economic investment."
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2009
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