Analysts have been quick to respond to the Bank of Israel's decision to leave its interest unchanged in April, confounding expectations on the market stoked by a prediction from HSBC that the central bank would cut its interest rate to a negative level and launch a quantitative easing program of government bond purchases. The speed of their responses indicates that the analysts anticipated the actual decision.
Referring to soaring stock prices in Tel Aviv over the past couple of sessions, Ayalon Group chief strategist Yaniv Pagot writes scathingly, "Local investors behaved ridiculously and mindlessly in response to an isolated estimate by a foreign bank, respectable as it may be, since before the release of its review the scenario of an immediate further interest rate cut and an immediate quantitative easing program was not a main scenario on the local capital market. It turns out that the forecasting ability of a foreign bank is just as limited as that of native Hebrew speakers."
Pagot says that continued focus by the Bank of Israel on supporting exports will be at the expense of other important economic considerations, such as the raging housing market and the risks of the rise in cheap credit being taken by Israeli households. The Bank of Israel's concern to restore inflation levels to within the government target range of 1-3% is putting it under pressure, he argues, while the falling prices in the economy may be non-inflation of a welcome kind, reflecting structural changes in the Israeli economy leading to greater competition and hence lower prices, as well as low global commodity prices.
"The Bank of Israel's decision not to cut its interest rate was a matter of a waiting game," says Tamir Fishman owner and CEO Eldad Tamir, "After the last rate cut, and after the shekel-dollar exchange rate went over NIS 4/$, the bank decided to wait to see more economic data, chiefly growth, employment, and indicators that can be expected to be higher. Today's decision contains a signal of a clear trend at the Bank of Israel, that it is ready and willing to take whatever steps may be necessary to weaken the Israeli currency against the basket of currencies."
Idan Azoulay, chief investment manager at Epsilon Investment House, says in his response to the interest rate decision, "The renewed strengthening of the shekel immediately after the interest rate announcement means that the Bank of Israel will at some point have to go back to taking part in the global currencies war, whether by lowering its interest rate or through quantitative easing."
Ori Greenfeld. chief economist and strategist at Psagot, estimates that in the immediate future the Bank of Israel's policy will be determined by developments in the foreign exchange market. "If the shekel strengthens again against the currency basket, it is certainly conceivable that the Bank of Israel will cut its interest rate again and/or announce a quantitative easing program."
Infinity Investment Group chief analyst Uzi Levi believes that the effectiveness of quantitative easing in Israel is unproven. "If the Bank of Israel is really determined to take action to weaken the shekel against the basket, it would be better advised to take aggressive, direct action on the foreign exchange market. The foreign exchange market in Israel is a fairly narrow market, one that is easy for a strong central bank with large foreign currency reserves like the Bank of Israel to act in, as opposed to the bond market. It is desirable for the Bank of Israel not to cut the interest rate to a negative level, because of the negative effect this is liable to have on the economy, but rather to leave it at a near zero level for an extended period."
Published by Globes [online], Israel business news - www.globes-online.com - on March 23, 2015
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