Analysts divided on likely BoI interest moves

Some see the April inflation reading as giving the central bank room for further cuts, but home prices are a concern.

Analysts believe that the 0.4% rise in the Consumer Price Index (CPI) in April 2013 gives the Bank of Israel maneuvering room to make another interest rate cut in the future, following its extraordinary mid-month cut by 25 basis points to 1.5% on Monday, which will come into effect on Friday.

Prico Risk Management and Investments CEO Yossi Fraiman says, "The CPI rose by 0.4%, as expected, which allows the Bank of Israel to make another interest rate cut, given that the inflationary environment is at the midpoint of the government's 1-3% target range. A further depreciation of the shekel to above today's rate of NIS 3.645/$ will reduce the need for aggressive intervention by the Bank of Israel at this time. The Bank of Israel will continue to act to keep the shekel-dollar exchange rate stable at over NIS 3.65/$."

Ayalon Group chief strategist Yaniv Pagot says, "The CPI for April was unsurprising, either in its bottom line or in the behavior of its components. The fact that the April CPI was substantially lower than the ten-year average for the month gives the Bank of Israel the necessary flexibility to focus on encouraging growth, and also frees it from inflationary pressures in the economy. The CPI and accompanying housing data are a painful reminder of the threat of a housing bubble. The low interest rate is a strong tail wind for a further rise in housing prices.

"In the coming months, in addition to seasonal inflationary factors, there will be effects of the indirect tax hikes, including VAT, and taxes on cigarettes, alcohol, and luxury goods. We believe that these factors will add a cumulative 0.7 percentage points to the inflation rate."

Harel Insurance research department head Ofer Klein said, "The CPI rose in line with the analysts' consensus, and the momentum in housing prices also continued in April. Housing prices rose by 0.5%, and are over 10% above the level of a year ago. We believe that a further rise in housing prices, combined with the Bank of Israel's unexpected interest rate cut and the foreign currency purchasing program, both announced on Monday, will weaken the basic pressure which is strengthening the shekel, reducing the likelihood of another interest rate cut in the coming months."

Merrill Lynch says that it had expected the Bank of Israel to announce an interest rate cut at its usual time at the end of the month. If the shekel stays strong, amid a fragile global economy, the interest rate could remain steady at 1.5% through the end of the year. The foreign currency purchasing program's $2.1 billion target through the end of 2013 is much less than the purchases in 2008-11. But the length of the new program through 2018 (when Israel's sovereign wealth fund is due to be established), combined with Monday's interest rate cut, signals that the Bank of Israel is determined to deter an appreciation of the shekel.

Published by Globes [online], Israel business news - - on May 16, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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