Citi analyst David Lubin says that while interest rate cuts by the Bank of Israel earlier in 2009 were motivated by fear of deflation, that concern is now an "almost evaporated risk."
Lubin points to the 24-month-ahead expectations for the Consumer Price Index (CPI). Expectations rose to 2.4% last month from 1.5% in the first quarter. Those expectations, and the very rapid growth of the money supply - 51% year over year in April - pose some inflationary risk if and when demand recovers. The Bank of Israel noted yesterday that “the negative trend in economic activity may be moderating”.
Governor of the Bank of Israel Prof. Stanley Fischer kept the interest rate unchanged at 0.5% yesterday.
The Citi analyst sees a reasonable chance that rates will have to rise by year-end.
Lubin also looks at the shekel-dollar exchange rate, which has fallen recently. The stronger shekel should create some disinflationary pressure. Yet the Bank of Israel’s recent statements make it clear that it intends to continue accumulating foreign currency reserves for the time being in order to avoid what Lubin terms "unwelcome" appreciation of the shekel.
As a result, Lubin comments that we may see this year the curious combination of the Bank of Israel simultaneously purchasing dollars and raising interest rates.
Published by Globes [online], Israel business news - www.globes-online.com - on May 26, 2009
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