Daniel Hewitt, the Barclays Capital analyst who correctly predicted that Governor of the Bank of Israel Prof. Stanley Fischer would raise the interest rate by 50 basis points yesterday to 3%, told "Globes" today that he believes that Fischer will make the same rate hike on April 24. He says that the Israeli economy is "on fire" and that Fischer's aggressive measure is absolutely justified.
Hewitt said, "Israel's economy showed very robust growth in the fourth quarter of 2010 (7.8%), which caused the Bank of Israel to begin raising the interest rate in increments of 25 basis points every month. That is what it did in February and March. Then came the inflation figures on March 15, and we saw that inflation was far above forecasts. Annual inflation is 4.2%, which is a serious deviation. It became clear to me that there would be a 50 basis point rate hike this month."
Almost all analysts had thought that Fischer would raise the interest rate by 25 basis points yesterday; Hewitt predicted the more aggressive rate hike, and he believes that Fischer will continue his aggressive monetary tightening. Most analysts currently believe that he will keep the May interest rate unchanged, or raise by 25 basis points.
Hewitt says, "I believe that the Bank of Israel will raise the interest rate by another 50 basis points in April to 3.5%. After that, there will be a pause, before it makes four more 25-basis point rate hikes later in the year to 4.5%, at which point the Bank of Israel will feel comfortable and review the situation. This could very well be the end of the cycle of rate hikes; in other words, there will be no interest rate hikes next year. I think that 4.5% will restrain the wild beast."
"Globes": Do you think that such an aggressive interest rate is justified? After all, the interest rate does not affect rising global commodities and food prices, and its effect on the real estate market is limited, because of the housing shortage.
Hewitt: "The move was justified and necessary. It's true that rising commodities prices are driving inflation worldwide, but the problem in Israel is more one of food prices than commodities. Housing is a problem and there is a lot of evidence that Israel's domestic economy is boiling; it's really on fire. 7.8% growth in the fourth quarter is very high figure and has to be restrained."
Israel's risk premium has risen lately because of the uprisings in the Arab world. How do foreign investors currently view investing in Israel?
"I consider Israel as an island in the middle of the Middle East. Obviously, the economies surrounding Israel are not alright; the economy of Egypt and other countries will not show strong performances. As for Israel - it's politically isolated in the region, but in this case, the isolation contributes to the economy. In general, foreign investors believe that the Israeli economy can absorb bad political news and not be affected. As for the risk premium - it's rising all over the world, not only in Israel."
Published by Globes [online], Israel business news - www.globes-online.com - on March 29, 2011
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