The Bank of Israel will not raise its interest rate before 2017 even if the US Federal Reserve starts to raise its rate shortly, according to Leader Capital Markets chief economist Yonatan Katz.
"The Israeli economy will struggle to grow at 3%, and is liable to be stuck at a growth rate of 2.5%, similar to that for this year, despite huge investment by Intel amounting to $6 billion over the next two years which will contribute 0.3% to GDP in 2016," Katz writes in his weekly market review. He emphasizes that the current wave of terror attacks will continue to affect tourism and private consumption.
Katz puts Israel's true inflation rate at 0.5% rather than the 0.9% as claimed by the Bank of Israel, which has recently chosen to deduct "administrative price reductions" (such as a cut in electricity rates) from the Consumer Price Index. "It seems that the Bank of Israel has chosen a convenient inflation profile that supports interest rate stability rather than a further reduction," Katz writes, "Reference to core inflation, which excludes prices of food and fresh produce, has disappeared. Fresh produce prices have risen 13.5% in the past twelve months, because of natural factors rather than excess demand, contributing 0.4% to general inflation."
On last week's interest rate announcement, which stated that "the Monetary Committee estimates that monetary policy will remain expansionary for a long time," Katz writes, "This is a clear statement conveying the message that there is no direct connection between the Fed's interest rate and the Bank of Israel rate. The only connection, apparently indirect, is via the shekel-dollar exchange rate and its impact on the inflation environment. It is reasonable to assume that the interest rate in Israel will not rise before 2017."
Published by Globes [online], Israel business news - www.globes-online.com - on November 29, 2015
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