The rise in inflation expectations and the rise in government bond yields pose a complex dilemma for the Bank of Israel. On the one hand, the rise in inflation expectations pushes annual inflation in the direction of the Bank of Israel's target range of 1% to 3%, while on the other hand the rise in expectations causes a 180 degree turn in terms of pricing the Bank of Israel's interest rate.
If two months ago, the market was pricing in a possible rate cut to zero or even negative territory, then today, according to the capital market falls, there is a 100% likelihood of the Bank of Israel hiking the interest rate in 2021. Governor of the Bank of Israel Prof. Amir Yaron spoke about this dilemma to CNN earlier this week. He said that despite the sharp rise in expected growth and the rise in inflation environment, the Bank of Israel's interest rate will remain "lower for longer."
Yaron stressed that the rate would stay low because of high unemployment and the fact that inflationary expectations are at the bottom end of the Bank of Israel's target range. Market sources believe that will be 1.1% in 2021.
When asked by CNN's Richard Quest if the bank will continue its quantitative easing program, Yaron said that the current program would be completed well into the late parts of the summer and after that the Monetary Committee would need to make a decision whether to extend or end the program.
Mizrahi Tefahot Bank (TASE:MZTF) chief strategist Modi Shafrir said that due to the renewed opening up of the economy and the fall in infection rates, the Israeli economy is expected to grow sharply in the coming quarters and may even be above forecasts. He also believes that US Federal Reserve chair Jerome Powell will announce in August at the annual Jackson Hole meeting of central bank heads that the Fed quantitative easing plan will begin tapering off at the start of 2022, which would make it difficult for the Bank of Israel to extend its purchasing plan.
Published by Globes, Israel business news - en.globes.co.il - on March 4, 2021
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