In a review of the prospects for the Israeli shekel and interest rates in Israel, Merrill Lynch says that the European Central Bank's quantitative easing policy has bought time for the Bank of Israel despite continued deflation and sharply lower oil prices. It therefore sees no change in the Bank of Israel's interest rate in the decision due on December 29. "However, in our view it is important for the Bank of Israel to reaffirm its bias for a weak shekel, as balance of payments fundamentals reveal less supportive but no depreciation pressures on the currency," Merrill Lynch writes.
Looking further ahead, Merrill Lynch expects an interest rate cut in the first quarter of 2015, unless the shekel continues to weaken. "Unless the steep shekel depreciation trend continues into next year, we think that by the end of Q1 2015 it will be difficult for the Bank of Israel not to cut after several months of the economy in deflation and no response from the central bank," the review states.
Merrill Lynch notes that the depreciation in the shekel over the past few months is justified by a decline in the current account surplus from $2.7 billion in the second quarter to $1.7 billion in the third, but says that considering the impact of Operation Protective Edge, the third quarter results are "not that bad."
Merrill Lynch also notes that the financial account trend is now less supportive of shekel appreciation than it was. "Portfolio investments by Israelis abroad continue to be significant, with $2-2.5 billion outflow on average every month in the last three years. But positively there has been a welcoming trend of inward investments in the last year, particularly in bonds and notes. The increase in investment abroad by Israeli institutions is in our view structural. The public’s financial assets portfolio is more than three trillion shekels as of Q3 2014 and growing at an average rate of around 7% since 2012. This compares with total domestic bond and equity market of less than two trillion shekels. Consequently, institutions’ exposure to foreign assets has risen to 22.8% in Q3 2014 from 17.6% in 2012."
Published by Globes [online], Israel business news - www.globes-online.com - on December 16, 2014
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