Union Bank of Israel (TASE: UNON) estimates that the Bank of Israel's key interest rate, currently at 5.5%, will fall by 25 basis points to 5.25% for next month.
"We are optimistic about the stock market, and in our view, we are close to a change in the long-term trend, mainly overseas, and the Israeli stock market will be affected by the trend," the bank's economists write in their weekly market review.
According to Union Bank, the combination of falling inflation expectations, falling oil prices, and a slowdown in the US real estate sector, has prepared the ground for interest rate cuts in the US and in Israel.
Union Bank also estimates that, if the shekel-dollar rate and oil prices remain at current levels, inflation will be around 1% in 2006, and 1.1% in the coming twelve months. For 2007, the bank estimates that inflation will be 2.3%.
Technically, support for the Tel Aviv 25 index lies at 782 points, while the nearest resistance level is at 870 points, although a more important resistance level is at 900 points.
As far as the foreign exchange market is concerned, the bank says that, alongside the recent weakness of the dollar, the fall in the long-term interest rate curve overseas and in Israel reflects investors' belief that interest rates will fall soon and that the US economy is headed for a slowdown.
The strength of the shekel against the dollar stems, according to Union Bank, both from factors in the US economy, such as a widening current account deficit, and from local factors, chiefly the government's responsible fiscal policy. The damage from the Lebanon war is turning out to be of the order that was predicted, and there has been no breach of fiscal policy.
The main cause of the shekel's strength is the inflow of money from overseas, which can be seen as a vote of confidence in the Israeli economy. The inflow of dollars from the $4 billion acquisition of Iscar by Warren Buffett is one thing that accounts for the surplus of US currency in the local market.
Nevertheless, the strength of the shekel over time harms exports, and voices can be heard in industry calling for intervention by the Bank of Israel by means of the interest rate, especially as inflation has slowed substantially.
A reduction in shekel interest rates would make the Israeli currency less attractive and would therefore tend to lift the shekel-dollar exchange rate, but such a move depends on several factors, among them the rate of inflation and the US Federal Reserve's interest rate policy, and in any case it can be expected to be gradual.
After the recent fails in the shekel-dollar rate, it would seem that an interest rate cut will happen earlier than had been expected, Union Bank says.
Technically, the shekel can be expected to be in the 4.25-4.31 range against the dollar this week, according to Union Bank, with the nearest support level at NIS 4.2536/$, and the next support level at NIS 4.224/$.
Published by Globes [online], Israel business news - www.globes.co.il - on October 8, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006.