The global rise in bond yields reflects the growing assessment that the recent surge in inflation is not temporary and is pushing central banks into action. Inflation expectations are at their highest for a decade, and some banks have begun the cycle of interest rate rises, and have even stated that they will continue to raise rates in the future. Some important central banks, however, such as the European Central Bank and the US Federal Reserve, are convinced that the inflation is temporary and that interest rate hikes can wait.
In comparison with other central banks around the world, the Bank of Israel has room for maneuver, with a bond market pricing in annual inflation of 2.8%. Nevertheless, the tone in the bank's Monetary Committee has changed. At last month's meeting to determine the bank's key interest rate, one of the committee's six members supporting raising the rate.
"This may be far from representing the stance of the committee as a whole, and in any case the make-up of the committee was recently changed, but still, it signals a change of mood," says Victor Bahar, chief economist at Bank Hapoalim. "Among the heads of central banks around the world too, fears are rising that inflation could stay higher for a longer period of time. The more we see interest rate rises in other countries, such as the UK for example, the higher the chances that interest rates will rise in Israel. An interest rate rise in the first half of 2022 has become a realistic scenario."
Bank Leumi chief economist Gil Bufman, on the other hand, expects no change in the interest rate. "Despite the rise in the inflation environment, the Bank of Israel's interest rate is not expected to change in the near future, and the Bank of Israel is expected to end the use of expansionary bond tools by the end of the year and to take a waiting stance on the interest rate tool. All the same, it would appear that a continued trend of rising interest rates around the world will be liable gradually to increase the pressure for an interest rate rise in Israel as well, particularly if the rise in the inflationary environment continues, because of global shortages, rises in energy prices, and pressure on supply chains. It's important to remember that the Bank of Israel has more degrees of freedom than central banks in other countries. Therefore, the pressure on the long parts of the curve, even if only partially in comparison with the US, is liable to continue to come from a continued rise in yield levels around the world."
In the US, the market is pricing in an interest rate hike by the Federal Reserve in mid-2022, which is adding to the pressure on the Federal Reserve chairman, who is currently dealing with the timing of the announcement of the tapering of the quantitative easing program. "The Federal Reserve chairman, Powell, estimated on Friday that inflation was strong but would start to fade from the middle of 2020, and he tried to cool expectations of an imminent interest rate hike by differentiating between that and the tapering plan," said Phoenix-Excellence chief economist Amir Kahanovitz. "Powell said that this was the time to reduce bond purchases, not to raise interest rates. But the bond market was not convinced. It is still pricing in two rises in 2020."
Kahanovitz adds however, "You won't find anyone who will agree to pull the interest rate trigger in the US. It's easy to talk about an interest rate hike, until you're the one who has to pull the trigger and take the risk of making the economy grind to a halt, the risk of causing suffering, and has to take the wrath of the president and the entire population. It's too much for one person to bear on their shoulders. The longer you're at the Fed, the more 'dovish' the practicalities of the job make you."
Published by Globes, Israel business news - en.globes.co.il - on October 25, 2021.
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