Citi analyst David Lubin says today that although the Bank of Israel left interest rates unchanged yesterday, its announcement that it will end its program of buying government bonds on August 5th shows that it is moving toward tighter monetary policy.
Lubin expects the Bank of Israel to be the first central bank in the world to raise interest rates this year.
The analyst says that the bond purchase program was the least effective of the tools employed by Governor of the Bank of Israel Prof. Stanley Fischer to adjust monetary conditions, so ending the program is essentially a gentle way to change the bank's "body language" on monetary policy.
The Bank of Israel pointed to two main developments in its notice on the interest rate decision inflation, which is expected to remain high over the coming months, and positive macro-economic data (though the bank pointed out that it was too early to say the corner has been turned).
Lubin expects the Bank of Israel's dollar purchase program to continue, in order to avoid an unwelcome appreciation of the exchange rate. "For that reason, it seems likely that the next major policy move will be a modest hike in interest rates, which we expect to occur in the fourth quarter. Either way, though, the stage seems set for a stronger shekel: our forecast continues to suggest that short dollar/shekel positions should make money."
Published by Globes [online], Israel business news - www.globes-online.com - on July 28, 2009
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