HSBC sees negative interest rate, QE in Israel

Karnit Flug  picture: Eyal Yitzhar
Karnit Flug picture: Eyal Yitzhar

HSBC: The Bank of Israel has no option but to adopt new unconventional tools.

HSBC expects the Bank of Israel to cut its interest rate to below zero and to launch a quantitative easing program in the range of NIS 24-72 billion.

In a survey sent by HSBC to its customers, analysts Murat Toprak, Melis Metiner, Di Luo and Tom Nash say the Bank of Israel will cut its interest rate by 0.2% to -0.1% at the forthcoming meeting of its Monetary Committee next week, and at the same time will launch the quantitative easing program of government bond purchases. Alternatively, the analysts say, the central bank could cut its interest rate next week and launch the quantitative easing program in the second quarter.

"The current unprecedented circumstances and a foreign exchange intervention tool that is getting increasingly exhausted suggest the Bank of Israel may have to take unprecedented measures to weaken the shekel not only against the US dollar but also against the euro. To achieve this, the central bank has no other option but to adopt new unconventional tools. This is especially true given Israel’s strong macro fundamentals which may foster and accelerate unwelcome shekel appreciation without bold monetary easing," HSBC's survey states.

The analysts note that the Bank of Israel cut its policy rate to a new record low of 0.10% in February with the objective of weakening the shekel, but that "the impact of this cut on the currency has been limited" and that the exchange rate of the shekel versus a euro-dollar basket has in fact "strengthened back to levels which triggered a monetary policy response in the past." The analysts see the general weakness of the euro as a headache for the Bank of Israel.

As for the size of the quantitative easing program, HSBC says, "While our base case is to expect NIS 27-31 billion, the most aggressive scenario of a near NIS billion bond buying programme (nearly 7% of GDP or 14% of tradable government debt) cannot be excluded should the urgency emerge."

As far as the effect of such moves is concerned, HSBC sees move to negative interest rates and the announcement of quantitative easing as likely to have a substantial negative impact on the shekel, and therefore we now sees the shekel-dollar exchange rate rising to NIS 4.30/$ this year, compared with a previous estimate of NIS 4.10/$. "The potential rate cut and QE announcement - in addition to Israel’s virtue of being less dependent on external financing - leaves Israeli rates as a unique bullish case for bonds within the CEEMEA region. We expect a further rally and significant outperformance to peers in both risk-on and risk-off scenarios," HSBC says.

Published by Globes [online], Israel business news - www.globes-online.com - on March 19, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Karnit Flug  picture: Eyal Yitzhar
Karnit Flug picture: Eyal Yitzhar
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018