"The Bank of Israel has sprung a surprise and upset the apple cart. It has used up all its interest rate ammunition in its two latest decisions," writes Shmuel Ben Arieh, head of research at Pioneer, in response to yesterday's announcement by the Bank of Israel that it will cut its interest rate from 0.5% to 0.25% for September.
Ben Arieh says that the Bank of Israel is under pressure from the level of the Consumer Price Index, which looks like undershooting the government's 1-3% price stability level this year. "The Bank of Israel is reducing the price of money to zero levels, with the idea that people will not save, and will go out and consume. In the current situation, it seems that things will carry on as they have been, and most of the money will go into the real estate market… Without restrictions, the money will continue to go into mortgages and to inflate the real estate bubble, and will probably not expand demand in the economy."
FXCM Israel head of research Moshe Shalom says in response, "There's nothing like riding the wave. While the shekel is weakening rapidly against the US dollar, the Bank of Israel has decided to give the Israeli currency an extra push. A real estate bubble? Not exactly a problem just now, with the politicians responsible (the ministers of construction and of finance) doing everything possible to slow the pace of home purchases. In effect, they have caused the market to collapse. And so the Bank of Israel is free to bring the interest rate close to zero and make exporters smile even more broadly."
Leader Capital Markets macroeconomist Yonatan Katz says that the interest rate cut is intended, among other things, to strengthen the trend of depreciation of the shekel, in order to improve the profitability of exports and halt the deflationary trend in the Israeli economy. According to Katz, the next stage in the Bank of Israel's expansionary monetary policy can be expected to be quantitative easing.
Utrade Investment House senior analyst Elad Solomon says, "This is a controversial decision that caught the market by surprise. This is more fuel on the real estate market bonfire, which continues to blaze. In addition, an economic distortion has been created in the return on risk that the Israeli economy represents. The Bank of Israel will benefit from additional weakening of the shekel against the US dollar. The governor wants to make credit cheaper in the economy, and so in the near future we shall see many more corporate bond offerings."
Ilan Artzi, chief investment officer at the Halman-Aldubi Group, says, "The interest rate cut is a declaration by the Bank of Israel that it is ready to support economic growth, given the military operation and its consequences for the economy. The Bank of Israel fears a substantial slowdown in Israel, which could lead to negative growth in the third quarter of 2014. The Bank of Israel hopes that the interest rate cut will also encourage further depreciation of the shekel. The main problem that the central bank will now have to cope with is that the interest rate weapon has done as much as it can, and in order to encourage growth in the future it will have to use other monetary tools, such as buying bonds."
Published by Globes [online], Israel business news - www.globes-online.com - on August 26, 2014
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