Foreign investment banks are split about whether the Bank of Israel will raise the interest rate for March, after the Central Bureau of Statistics announced yesterday that the Consumer Price Index (CPI) rose 0.2% in January, and 3.6% for the preceding 12 months, above the above the government's 1-3% price stability target.
Goldman Sachs believes that the unexpectedly high CPI will lead the Bank of Israel to raise the interest rate next week, in order to rein in inflation. It believes that rising inflation expectations and house prices are also likely to remain a cause of concern to the Bank of Israel.
Goldman Sachs says that rising inflationary pressures, especially in food and transport categories have also caused political tensions recently. It believes that the Bank of Israel will raise the interest rate by 25 basis points next week, and to 3.5% by year end from the current 2.25%.
JPMorgan disagrees. It does not think that the Bank of Israel will raise the interest rate for March, because this could cause the shekel to appreciate. JPMorgan agrees with Goldman Sachs that the Bank of Israel will raise the interest rate to 3.5% by year end, and to 4.5% in 2012, but that it will begin raising rates only in the second half of the year.
If the Bank of Israel raises the interest rate while the US Federal Reserve keeps its interest near zero, the widening interest rate gap in favor the shekel will result in capital inflows, especially to buy short-term financial instruments such as makams (Treasury notes) that will strengthen the shekel.
JPMorgan says, "Yet, the fear of too strong shekel is probably still a dominant policy consideration in the Bank of Israel. The shekel-dollar at NIS 3.65/$ is hardly satisfying for the Bank of Israel after several regulatory announcements to discourage foreigners’ involvement in shekel market and increase in geopolitical risk (Egypt). Thus, we think that it will take some time, and potentially further regulatory measures on the foreign exchange front, for the Bank of Israel to step-up the pace of rate hikes."
Published by Globes [online], Israel business news - www.globes-online.com - on February 16, 2011
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