Following HSBC's exceptional review on Thursday, which boosted the Tel Aviv Stock Exchange (TASE) to a new record and caused the shekel to drop against the dollar and the euro, Israeli market analysts are predicting that the Bank of Israel will be in no hurry to buy bonds.
"Given the low inflationary environment, and in an attempt to weaken the shekel, the Bank of Israel can be expected to continue cutting the interest rate, but not necessarily in its next decision, writes Leumi Capital Markets macroeconomic analyst David Reznik in his weekly review. "The likelihood of reaching a negative interest rate within a few months is high. Nor can the possibility of an interest rate cut to zero percent interest in the next interest rate decision as a transition stage and preparation for a later negative interest rate be ruled out."
HSBC predicted last Thursday that the Bank of Israel would lower the interest rate by 0.2% to -0.1% tomorrow. HSBC also expects the Bank of Israel to launch a quantitative easing program tomorrow or during the second quarter, in which it will make bond purchases of up to NIS 72 billion.
According to Reznik, an interest rate cut should be expected in the near future (not necessarily tomorrow), but there is little chance of bond purchases: "The Bank of Israel's monetary expansion is expected to be expressed in the use of the interest rate tool, and later in intervention in the foreign currency market. Quantitative easing in the form of purchases of government bonds is less likely, and purchases of and non-government bonds is probably not on the agenda at all. The Bank of Israel is already engaging in de facto quantitative easing in a way that is less disruptive to its activity in the foreign currency market."
Reznik believes that an interest rate cut is more likely in May-June, although he does not rule out the possibility that the interest rate will be cut as early as tomorrow.
Yetzirot Investment House chief economist Ayelet Nir believes that the HSBC forecast is too bold. "It is easy to get carried away by the HSBC forecast, because if the Bank of Israel chose to cut the interest rate a month ago, based on the exchange rate, it is not likely to stop at last month's decision. Another rate cut and quantitative easing in order to try to devalue the shekel in the context of the global currency free-for-all is probable," Nir writes in her report. "In our opinion, however, the rise in inflation expectations following the publication of the February Consumer Price Index, the shekel devaluation, and reports of figures that do not support a weakening of the economy are expected to postpone the decision on cutting the interest rate below zero percent or quantitative easing to a later date."
Jonathan Katz and the economists at Leader Capital Markets Ltd. (TASE:LDRC), however, state in their review, "An interest rate cut tomorrow, possibly to a rate of -0.1%, is very likely in order to combat deflation and the shekel appreciation (against the basket of currencies). In addition, an announcement of a quantitative easing program through purchases of foreign currency and/or government bonds is possible."
Published by Globes [online], Israel business news - www.globes-online.com - on March 22, 2015
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