Citi analyst David Lubin sees the Bank of Israel making a further 25 basis point interest cut at its regular monthly Monetary Committee meeting on Monday. Lubin points out that the minutes of the meeting last Monday, at which an extraordinary rate cut of 25 basis points was decided upon, "suggest that the Committee was evenly split between a 25 bp cut and a 50 bp cut, and the tie was broken by the Governor, Stanley Fischer, who opted for a 25 bp cut to 1.5%, 'believing that this measured reduction together with the (fx) purchasing program, would be sufficient at this stage to deal with developments in the foreign exchange market, and the effect of this reduction would be assessed at the normal decision time' (emphasis added)."
"A few pieces of information have materialised since the bank's surprise cut last week," Lubin writes, "The first is that inflation expectations have continued to decline: year-ahead CPI expectations, reported by the Bank of Israel on Sunday, are now 2.1%, compared to 2.8% in March. Second, the April PMI showed a 1 point fall to 50.8, with domestic new orders showing particular weakness. And third, the shekel has stabilised after its fairly sharp move early last week.
"Against this background, a further rate cut next Monday to 1.25% might be help achieve two objectives. It would reinforce the message the bank was trying to convey last week about its seriousness in pursuing a weaker exchange rate; and it would validate the weakness of economic activity and inflation expectations. For these reasons, we think the bank is set to cut its policy rate once again next week, with a strong possibility of another rate cut later in the year," Lubin's note concludes.
Published by Globes [online], Israel business news - www.globes-online.com - on May 22, 2013
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