Morgan Stanley wonders whether Governor of the Bank of Israel Prof. Stanley Fischer has turned dovish after keeping the interest rate for February unchanged at 1.25% yesterday.
Morgan Stanley analyst Tevfik Aksoy said that the decision was in line with expectations, and should have minimal, if any effect on the market. He added that while Morgan Stanley thought that an interest rate was possible, it was unconvinced, given the tame Consumer Price Index (CPI) in December.
Morgan Stanley added that Governor of the Bank of Israel Prof. Stanley Fischer "probably did not want to give an impression of raising rates steadily" after the interest rate hike in December. Fischer may raise the interest rate next month, depending on inflation and inflation expectations.
Morgan Stanley predicts that inflation will rise to over 4% in the coming months, which could affect inflation expectations, unless the Bank of Israel acts. It also notes that Israel's economic growth appears to have picked up speed, which was confirmed by the recent decline in unemployment.
Morgan Stanley pointed to the Bank of Israel's own statement about the interest rate decision. Morgan Stanley says that that Bank of Israel's comments about the low inflation in December and predictions of low inflation during the first quarter (partly because of the shekel's strength) and that it "downplayed the risk" that inflation expectations are near the upper limit of the 1-3% inflation target range. "We would consider this change in tone as an attempt to divert attention away from the issue," it said.
Morgan Stanley also pointed to the Bank of Israel's comments that "Israel's growth prospects have improved, but recently some uncertainty seemed to have escalated regarding the strength of the global economy."
Morgan Stanley concluded by saying, "The Bank of Israel seems to have been switching to a slightly dovish tone, which might become a little worrisome, especially if any surprise inflation prints are seen in the coming months."
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2010
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