Capital market sources believe that the Bank of Israel will keep the interest rate for June unchanged at 0.5%.
The Bank of Israel is still using two unconventional monetary weapons: daily purchases of $100 million, and daily purchases of NIS 200 million of government bonds. Capital market sources stress the importance of the text of the interest rate announcement, even if the rate does not change, but they will try to pry out clues about the future of these two purchasing plans, as well as the Bank of Israel's subsequent inflation policy.
A top capital market source told "Globes", "We're asking top Bank of Israel officials how and when they will stop this, and we get the impression that they don’t know themselves and that they're afraid. We've had very bad experience in this area: they always know when to start to intervene, but know a lot less when it comes to ending intervention in the market."
Referring to the proposed VAT increase, Meitav Investment House chief economist Ron Eichal said, "The pending tax hike is not expected to affect the interest rate in June, but it could result in overshooting the government's 1-3% price stability target, as has happened in the past two years. A third consecutive missing of the inflation target raises real concerns, and it is an issue that the Bank of Israel must take in hand."
Capital market sources add that there is little likelihood that Governor of the Bank of Israel Prof. Stanley Fischer will decide on a further monetary expansion, either by another interest rate cut or partial policy sterilization, and that such a step is not advisable, because the rate increase in the money supply is currently at an unprecedented 50%, and there is a clear and significant link between the money supply and inflation after a six-month lag.
Published by Globes [online], Israel business news - www.globes-online.com - on May 20, 2009
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