Market expects Bank of Israel to cut rate

Amir Yaron / Photo: Eyal Izhar, Globes

Analysts see an immediate interest rate cut as likely, but say the political instability in Israel could make the Bank of Israel wait.

The Bank of Israel is scheduled to announced its interest rate tomorrow. Most assessments say that Governor of the Bank of Israel Prof. Amir Yaron will lower the interest rate to 0.1%, after the US Federal Reserve Board cut its interest rate for the third time since July in its recent decision. It will nevertheless be interesting to see whether developments in the political arena affect the Bank of Israel's interest rate decision.

"The markets are pricing in an almost 100% probability that the Bank of Israel will cut the interest rate in its upcoming decision," economists at Leumi Capital Markets write in their weekly review. "The Consumer Price Index has risen only 0.4% in the past 12 months, and we believe that inflation in the next 12 months will remain at about that level. In other words, the inflationary environment at the present time remains moderate. It therefore appears that the Bank of Israel will lower the interest rate in the near future, although this measure will have little, if any, effect on the economy. The main question is one of timing.

"We think that given the fact that the most recent Consumer Price Index was in line with the market's expectations, and the figure for total growth in the third quarter, the Bank of Israel may wait before lowering the interest rate. The fact that another election is now more likely could result in a postponement of the interest rate cut. In any case, we will be surprised neither by a decision this week by the Bank of Israel to leave the interest rate unchanged, nor by a decision to cut the rate back to its all-time low."

Economists at Leader Capital Markets write, "Given the growing political instability, it is possible that the members of the Monetary Committee will prefer to postpone the interest rate cut. At the same time, in view of the shekel's stability on Friday, it appears that the markets have not been too excited so far about the political developments."

Moderate inflation

The inflationary environment remains moderate, with core inflation (excluding energy, fruits, and vegetables) is clearly declining, according to Leader Capital Market's economists. The company adds that the shekel has appreciated 2.3% since the beginning of November, and remained stable against the basket of currencies in the face of the October interest rate decision. To this can be added the mixed growth figures. "Excluding the change in inventory, growth declined by 2.1% in the third quarter… the other growth elements were definitely weak," Leader Capital Markets writes.

In the announcement of its most recent interest rate decision, the Bank of Israel cited the need to cut the interest rate in order to support a return to the middle of the inflation target range.

Published by Globes, Israel business news - en.globes.co.il - on November 24, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Amir Yaron / Photo: Eyal Izhar, Globes
Amir Yaron / Photo: Eyal Izhar, Globes
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