Goldman Sachs believes that Governor of the Bank of Israel Stanley Fischer will continue to raise interest rates, after keeping the interest rate for February unchanged at 1.25% yesterday. Goldman Sachs had predicted a 25-basis point rate hike.
Goldman Sachs said, "Despite the pause today, the tone of the statement leaves us very comfortable with our call that the Governor Fischer will continue to tighten policy - we see rates at 3% by year-end 2010 and 4% by year-end 2011, which is approximately in line with market pricing. The recent upward revision of the Bank of Israel's forecasts (including unemployment declining this year) is consistent with a much higher level of policy rates than we have at the moment. Policy rates remain approximately -1% to -1.5% in real terms (depending on the measure of inflation expectations used)."
Goldman Sachs notes, "Recent soft data - particularly lower than expected inflation in December - undoubtedly played a role in the pause this month." It adds that while 12-month inflation expectations have fallen from 2.7% to 2.3%, they are "conditional upon policy rates rising to approximately 2.8% in a year's time, and so these moderating inflation expectations do not give Governor Fischer much leeway to pause for a considerable length of time."
Goldman Sachs notes, "The Bank of Israel has been intervening on an ad hoc basis to stem the shekel appreciation, we think that the shekel is likely to continue to appreciate as interest rate differentials widen and the large policy stimulus that we have seen in Israel becomes evident in faster growth. We see shekel-dollar exchange rate at NIS 3.60/$ in three months."
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010