Analysts slam Bank of Israel on rate hike

Dr. Nadine Baudot-Trajtenberg

Analysts at Infinity, Halman Aldubi, and Leumi Capital Markets all took issue with the Bank of Israel's decision.

On Monday, the Bank of Israel Monetary Committee headed by Acting Governor Nadine Baudot Trajtenberg raised the interest rate by 0.15% from its historic low of 0.1% to 0.25% - the first hike since 2011. Most analysts were suprised by the hike and continue to insist that the Bank of Israel erred. Infinity, Halman Aldubi, and Leumi Capital Markets analysts all took issue with the Bank of Israel's decision.

Infinity Investment Group owner, chairperson, and chief investment manager said, "The Bank of Israel's interest rate hike was small, but is a completely mistaken economic measure that is liable to weaken economic growth. Not only is there no inflation, but the Consumer Price Index is likely to fall sharply in the coming months, there is a slowdown on the real estate market, new vehicle purchases are down, and household credit is stagnating. The interest rate hike therefore lacks any economic logic and does not contribute to the economy."

Eyal added, "This unnecessary step follows another odd decision by the Bank of Israel - to reduce its foreign currency purchases and not to balance the expected future entry of dollars resulting from natural gas money. Both the halt in foreign currency purchases and the interest rate hike are pushing down the shekel exchange rate and are already harming profit margins on Israeli exports - the sole factor maintaining economic growth, now that the real estate and auto sectors are slowing down.

"The decision was taken just before the new governor of the Bank of Israel takes up his position. Instead of waiting for him, they announced a new drama that will cost the economy more money via prime rate interest loans and mortgages and harm exporters and the economy through a shekel appreciation. It is unclear why the Bank of Israel hurried to raise the interest rate when it is still unclear whether the US will really increase its interest rate in the coming months, as was previously thought. If the US Federal Reserve Board surprises everyone by not raising the interest rate, the Bank of Israel's measures will appear completely absurd."

Halman Aldubi Investment House VP investment Lior Yochpaz says, "The Bank of Israel raised the interest rate by 0.15%, while the market took into account an initial hike only in early 2019. This interest rate hike is surprising, given that the new governor has not yet taken office and the decision was made without him, while there is no urgent reason for not delaying the decision until next month. The decision is also astonishing because the inflation in contracts for the next 12 months were traded at below 1%, i.e. below the Bank of Israel's target, and forecasts by economists also do not mention inflation higher than the midpoint of the Bank of Israel's target. The Monetary Committee has five members. We saw in past decisions that two members already voted in favor of an interest rate hike.

"Our assessment was that there would not be an additional vote in favor of an interest rate hike before the arrival of the new governor and the end of the temporary governor's term. Towards the end of former Governor of the Bank of Israel Karnit Flug's term, the market was concerned that she would want to take credit for the first interest rate hike and make it earlier than necessary. Despite the premature interest rate hike, inflation in the coming months will continue to be around the lower bound of the Bank of Israel's target. If the drop in oil prices continues or is consolidated, there will probably not be any further increases in the interest rate. Beyond the damage to the Bank of Israel's credibility that can result from such a measure, we believe that a premature hike like this one can make it difficult to raise the interest rate in the future. In any case, we foresee no more than two interest rate hikes in 2019 - certainly in view of the fall in inflationary expectations to the midpoint of the curve. These expectations reverted to 1.3% this month, the same level as at the end of 2017."

Leumi Capital Markets macroeconomic research manager David Reznik wrote, "The Bank of Israel explains its decision by saying that inflation stabilized a little above the lower bound of the target, and that the economy is growing according to its growth potential. The shekel weakened recently by more than 3% against the basket of currencies and the dollar. The Bank of Israel also asserts that policy remains expansionary even after the interest rate hike.

"The timing of the interest rate hike is surprising, because in its most recent statement, the Bank of Israel Research Department put off its project of an interest rate hike from the current quarter to the first quarter of 2019."

"Since the previous decision in early October, inflationary expectations fell, oil prices plummeted 30%, and third quarter growth figures were slightly lower than the forecasts. The timing of the interest rate hike based solely on these data, given interest rate management in the framework of a price stability target, appears somewhat odd," Reznik continued. "The interest rate decision is the first without Flug, and it is possible that the interest rate hike at the present time may indicate that Flug was the one who responsible for leaving the rate unchanged before. It is possible that under the new governor, interest rate decisions will be affected not only by the inflationary environment, but also by other considerations not previously taken into account, such as general financial stability. It cannot be ruled out that the current decision was coordinated with the incoming governor, after the government approved his appointment over a week ago."

One of the few analysts who predicted that the Bank of israel would raise the rate and concurs with the decision was Leader Capital Markets macroeconomist Yonatan Katz.

He said, "As we forecast, the bank of Israel raised the interest rate today by 0.25% with the announcement stressing that inflation had stabilized somewhat above the bottom of the range, and there were expectations of salary raises and an expansive fiscal policy that will support consolidation of inflation within the target range. Growth in the economy is moving towards potential growth and there is full employment. The shekel has depreciated by 3.6% since the previous rate decision and the housing market is stable."

Katz added, "The path of future rate hikes will be gradual and cautious. We expect a rate hike in the second quarter of 2019 and then no change until the end of the year, while the US Federal Reserve will find it difficult to continue raising the interest rate in the second half of 2019."

Published by Globes, Israel business news - en.globes.co.il - on November 28, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Dr. Nadine Baudot-Trajtenberg
Dr. Nadine Baudot-Trajtenberg
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