Citi analyst David Lubin says that most analysts (of those recently surveyed by Bloomberg) expected no change in the interest rate, and that Governor of the Bank of Israel Prof. Stanley Fischer would have had a reasonable basis to do so. Fischer's decision on Sunday to raise rates by 25 basis points, therefore, is seen as a "commitment to gradualism", as he is expected to raise rates slowly but surely over the remainder of 2010.
With the Consumer Price Index (CPI) remaining relatively low so far in 2010, and money supply growth continuing to slow, Lubin says the Bank of Israel could have left rates unchanged this month, as apparently many economists felt it would. The decision to raise rates now may have been based on indicators showing that economic activity is reasonably robust (the analyst points to industrial production growth in January of 4.4% year over year), and the bank's hope to avoid bigger interest rate surprises later in the year, as it referred to a “gradual process of returning the interest rate to a more ‘normal’ level” in each of its last three monthly policy statements.
Citi expects the interest rate to reach 2.5% by the end of 2010. This means, more or less, a 25 basis point rate hike every two months for the rest of the year. However, a 2.5% level will continue to support the shekel against other currencies, giving the Bank of Israel a "more acute" exchange rate dilemma. Lubin says, "Although an interest rate of 2.5% would still leave the shekel far from being a “carry trade” currency, our view is that, at the margin, more rate hikes should continue to encourage holders of foreign exchange to buy shekels, and partly for this reason we think that the shekel will remain well-supported. Moreover, since higher rates will be a reflection of stronger economic activity, the bank is likely to be less inclined to continue intervening in the foreign exchange market: another reason why the shekel should continue to appreciate."
Lubin expects the shekel to fall towards a level of NIS 3.6/$ in the coming months.
Published by Globes [online], Israel business news - www.globes-online.com - on March 31, 2010
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