The Bank of Israel is due to announce its interest rate decision for July at 16:00 today, and to hold a press conference afterwards. The consensus among market analysts is that the central bank will lower its economic forecasts because of the coronavirus pandemic, amid criticism that, unlike the central banks in the US and in Europe, the Bank of Israel has been slow to act.
Psagot Investment House chief economist Ori Greenfeld believes that the Bank of Israel will take some kind of expansionist monetary step. "First of all, the coronavirus statistics indicate that the growth and employment forecasts of the Bank of Israel and other forecasters will have to be revised downwards significantly," Greenfeld writes. "Secondly, last month's inflation reading was surprisingly low, and inflation expectations on the part of forecasters and the market have fallen accordingly. Thirdly, the government is expected to announce a further fiscal program (or more likely: a bit more of the same) and the Bank of Israel will probably want to give its support to the program, in a way similar to what has been done in other places.
"Fourthly, and perhaps most importantly, the shekel continues to appreciate. Against the basket of currencies, it has strengthened by 1.2% since the previous interest rate decision, and by 10.2% since mid-March. The only question, therefore, is what steps will the Bank of Israel choose to take? On the face of it, given that a negative interest rate is something that the Bank of Israel is really not enthusiastic about (rightly) we should expect that the steps chosen will be to do with intervention in the markets, such as expanding purchases of government bonds or expanding the range of assets purchased (such as to corporate bonds or mortgage/loan portfolios)," Greenfeld writes. "On the other hand, the makam (short-term government bond) market is already clearly pricing in a reduction in the interest rate to 0% by the last quarter of the year, and we have learned more than once that what is truer is also what is more likely to happen, so we estimate the probability of an interest rate cut at a little over 50%."
Published by Globes, Israel business news - en.globes.co.il - on July 6, 2020
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