Analysts split on January interest rate decision

Two-thirds of analysts polled by "Bloomberg" believe that the Bank of Israel will keep the interest rate for January unchanged.

Two-thirds of analysts polled by "Bloomberg" believe that the Bank of Israel's Monetary Committee, chaired by Governor Stanley Fisher will keep the interest rate for January unchanged at 2% at tomorrow's meeting. The other analysts believe that the Bank of Israel will make another 25-basis point cut in the interest rate to 1.75%. The Monetary Committee held its first meeting today, and will announce its decision at 5:30 pm tomorrow.

Macroeconomic figures in recent weeks have undermined the analysts' consensus that the Bank of Israel would hold the interest rate steady. First, the Consumer Price Index (CPI) for November against took the analysts by surprise, falling by 0.5%, compared with the consensus of no change. The drop in the CPI greatly reduces inflation expectations. The inflationary environment is very low: 1.8% over the preceding 12 months, below the midpoint of the government's 1-3% inflation target.

In addition, the jump in the current accounts surplus and the appreciation of the shekel against the dollar in recent months both support another interest rate cut.

Other factors would also seem to spur a possible interest rate cut: Israeli economic activity (demand and unemployment); Israeli fiscal figures (deficits and taxes); and the global economic environment. The latest figures indicate that Israeli private consumption per capita and imports of both consumer and investment goods are all falling, and that export growth and investment in construction are both continuing to slow. Unemployment is also rising.

The higher growth forecast that the Bank of Israeli is expected to announce concurrent with the interest rate decision for January will not improve the dismal macroeconomic picture. The higher growth forecast is due to the start of natural gas flows, which will not improve the country's fiscal or employment conditions.

The Monetary Committee is now clearly divided into two camps. The optimistic camp believes that there has been no substantial deterioration in Israel's economic activity, and supports keeping the interest rate unchanged. The pessimistic camp is headed by Fischer, who has already sprang an interest rate surprise in October by cutting the interest rate. If the Bank of Israel again cuts the interest rate tomorrow, it will reflect its true opinion about the future of the economy.

Published by Globes [online], Israel business news - - on December 23, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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