Next Monday the Bank of Israel Monetary Committee will announce its interest rate decision. Analysts in Israel and abroad think that due to the war the Bank of Israel will cut the rate fr5om 4.75% by at least 0.5%, while Citi analysts have even predicted a 0.75% cut.
But today the Bank of Israel provided a hint to the markets on what can be expected in next week's decision. Bank of Israel Deputy Governor Andrew Abir held a professional meeting with financial forecasters following a press conference about the central bank's program begun last week to sell foreign currency reserves. The press release issued after the meeting with the forecasters signals that the interest rate will remain unchanged in the near future, while the Bank of Israel is intervening in the foreign exchange market.
At the meeting with forecasters Abir said, "The Bank of Israel’s policy is focused on stabilizing the markets and creating maximal certainty for the economy and the public at this time. The Bank has started using a dedicated tool to stabilize the foreign exchange market, which has contributed to stabilizing and calming other markets as well, and we aim that the other monetary policy tools will not pose a challenge to this aim in the immediate term. As governor Yaron said earlier this week in his speech for the G30 group: "The main inflationary risk in the past nine months, and now even more so, is depreciation of the shekel."
In other words, the press release stresses that Bank of Israel policy is focusing on stabilizing the markets and creating maximum certainty for the economy and the public at the current time. Moreover, the bank states that the other monetary policy tools (like the interest rate for example) will not challenge the plan to stabilize the foreign exchange market in the immediate term.
Leaving the interest rate unchanged, when the market has been expecting a rate cut could cause more upheaval in the markets. Therefore, the Bank of Israel is trying to avoid this by providing advance notice in an attempt to calm the forecasters and the market.
Intervention by a central bank in the foreign exchange market is unusual. This is a major event that central banks try to avoid, because it may indicate distress in the financial system and may even lead to the opposite results in some cases.
Leader Capital Markets chief economist Yonatan Katz said, "Deputy Governor Andrew Abir lowered expectations for a quick interest rate cut next week when he emphasized that at the current time monetary policy is focused on financial stability and stabilizing the markets." Katz explains that the chance of an interest rate cut has greatly diminished but he still expects, "an interest rate cut in the coming months due to the expected moderation in economic activity."
Published by Globes, Israel business news - en.globes.co.il - on October 17, 2023.
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