Merrill Lynch has lowered its forecast interest rate for Israel, a move that analyst Jean-Michel Saliba admits "makes us more dovish than the market."
The strengthening of the shekel against the dollar in recent months, solid domestic demand, and the widening interest rate cap between the shekel and the dollar will likely put Israel's monetary policy back in the spotlight, says Merrill Lynch in a new survey.
Merrill Lynch says, "Should rapid foreign exchange strength continue, we think this would immediately force the Bank of Israel to slow its rate hike path." It now expects no more interest rate hikes this year, and hikes totaling 75 basis points in 2011, less than its previous prediction of 125 basis points.
If the rapid foreign exchange strength continues, Merrill Lynch says that this will force Governor of the Bank of Israel Prof. Stanley Fischer to slow down rate hikes, and will also "put the onus on the implementation of targeted housing-related macro-prudential measures as needed, especially as growth slows down in 2011."
Merrill Lynch adds that the 2.4% inflation rate for the 12 months through September "would have done little to assuage Bank of Israel concerns on the housing market. "We see some signs that housing supply is adjusting to demand with increased housing starts, but demand shows no sign of let-off with continued high levels of mortgage approvals."
It adds, "Historically, low rates have spurred an uptake in unindexed floating rate mortgages. While rate hikes have a broader macroeconomic impact, and some undesirable ones in export-oriented sectors at this juncture, delayed tightening ironically does little to normalize conditions in the housing sector. We thus see room for targeted macro-prudential intervention."
"Globes" recently reported that Fischer has contingency plans to severely limit mortgages to reduce housing demand.
Published by Globes [online], Israel business news - www.globes-online.com - on October 19, 2010
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