Leumi: Bank of Israel likely to cut interest rate

Bank of Israel

Leumi analyst David Reznik: Likelihood of an interest rate cut has increased, and it could come as soon as this week.

Last Friday featured a sharp decline on global stock markets in general, and especially in the US, with the leading US share indices down 6-7% on the week, the worst weekly fall in several years. The CBOE Volatility Index (VIX) reached its highest point since 2011, the government bond market posted lower returns, and oil prices reached their lowest point in almost seven years.

The basis for the fall in US share prices is concern about a slowdown in the Chinese economy, which would spread to other place around the world. This concern has grown recently, given the weak macroeconomic data from China, which reached a peak with the devaluation of the yuan two weeks ago by the Chinese central bank. In addition, the Chinese procurement managers index published on Friday was the lowest in the past six and a half years, indicate a severe economic downturn in China beyond what the markets expected. This slowdown comes on top of steep falls in the currencies of the emerging markets.

In view of the concern about a recession in China and the yuan devaluation, a consensus is growing that the US Federal Reserve Board is likely to postpone the interest rate hike that was anticipated for September, or by end of the current year at the latest. Under the current conditions, it cannot be ruled out that an interest rate hike will be put off until 2016. This is the opinion of Leumi Capital Markets macroeconomic analyst David Reznik in his weekly review.

Reznik believes that in the medium term, it is probably that the limited exposure to China is not expected to cause sustained falls in share prices on the Tel Aviv Stock Exchange (TASE), especially if the Bank of Israel lowers the interest rate in an attempt to weaken the shekel, and in view of the likelihood that an interest hike in the US will be postponed.

Will the Israeli interest rate be cut tomorrow?

Concerning expectations in Israel and tomorrow's Bank of Israel decision about the interest rate for September, Resnik says, "Up until last week, it appeared that the chances of an interest rate cut were low. After the developments of the past week, however, especially given the low inflationary environment and the fact that the shekel has greatly strengthened against the basket of currencies over the past two months, the likelihood of an interest rate cut has certainly increased, and it could come as soon as this week."

The government bond market today is expected to benefit from a drop in global yields, and it is likely that prices will rise at the start, especially unlinked shekel instruments, in view of the drop in oil prices and the low inflationary environment expected in the coming months. The increased probability of an interest rate cut will boost the government bond market. The corporate bond market is expected to benefit less, given the expected drop in the prices on stock markets, except perhaps for very highly-rated companies, which are more affected by the government bond market than by the stock market.

"Developments in China are expected to cause great volatility in the markets in the coming days. Leaving the interest rate unchanged on Monday is likely to again strengthen the market and the shekel, while an interest rate cut can be expected to continue the shekel's downtrend over the past week," Reznik said.

Published by Globes [online], Israel business news - www.globes-online.com - on August 23, 2015

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

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