The Bank of Israel Monetary Council will convene tomorrow in order to set the interest rate for November, amid growing expectations in the capital market of another interest rate cut and a declaration of quantitative easing measures.
Trading in short-term loans (STLs) indicates expectations that the interest rate will be cut by 0.10% to 0.15%, following two cuts since August of 0.25% each. In addition, commentators discussed the report in "Globes" at the end of last week that Governor of the Bank of Israel Karnit Flug was considering a renewal of government bond purchases, a measure not taken by the Bank of Israel since the peak of the 2009 global credit crisis.
Meitav DS chief economist Alex Zabezhinsky said today, "In addition to the (bond) purchases plan, the Bank of Israel is likely to rein in issues of STLs. Furthermore, like other central banks around the world, the Bank of Israel is likely to deliver a message that the interest rate will not rise for a long time." Psagot chief economist Ori Greenfeld said, "The Bank of Israel is rather restricted in the tools at its disposal, and another interest rate cut will not change much. We have seen press predictions about quantitative easing; such measures can in theory be declared tomorrow, and this is not unlikely but the Bank may prefer to wait another two or three months to see the effect of the shekel devaluation and the two recent interest rate cuts. In any case, even if a government bond purchasing campaign is decided, it is not expected to have a significant effect on the economic situation, because the long-term nominal interest rate is already around 2.2%, and it is hard to believes that those who have not yet taken loans will regard purchases of government bonds by the Bank of Israel as a dramatic step."
At its previous meeting the Monetary Council decided to leave the interest unchanged in October, after the rate reached a historic low of 0.25% in September. Expectations of an additional interest rate cut follow the 0.3% fall in the Consumer Price Index in September and a 0.3% drop in inflation over the past 12 months including the housing item, and a steep 1.2% fall in inflation, excluding housing.
Greenfeld believes that beyond the economic slowdown, the stagnation in trade, and low demand, the effects of measures taken in Israel, in particular the campaign to combat the cost of living, may also be playing a role in the deflation in recent months. He writes, "In the marketing chains sector, for example, we see a drop in prices as a result of intensified competition in the sector, following heightened public awareness of the subject."
Shekel devaluation increases business sector debt
The shekel devaluation against the dollar is the main cause of the rise in business sector debt in August. According to data published today by the Bank of Israel Information and Statistics Department, the balance of debt in the business sector rose by NIS 10.6 billion (1.4%) to NIS 781 billion in August. The department explained that the increase was mostly due to the 4.1% shekel devaluation against the dollar, which increased the shekel value of foreign currency-linked and denominated debt, and to net debt issues. NIS 2.9 billion was raised in bank loans bank and non-bank loans and negotiable bonds. This increase was slighting offset by repayment of overseas loans.
The business sector's debt is composed mostly of debt to local banks (49.2%), local negotiable bonds (21%), non-negotiable bonds and non-bank loans (11.1%), and debt raised overseas (18.7%). Household debt grew by NIS 1.9 billion in August (0.5%) to NIS 425 billion, and the balance of household debt for housing rose NIS 1.5 billion to NIS 298 billion at the end of August.
Published by Globes [online], Israel business news - www.globes-online.com - on October 26, 2014
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