In its latest review of the Israeli economy, Morgan Stanley urges the Bank of Israel to be extra careful in unchartered territory.
“The year-on-year rate of inflation moved from 2.4% at the end of 2005 and last year’s peak of 3.8% in April to -0.1% in December. But this was no ordinary inflation driven by weakening domestic demand or a real collapse in import prices,” Morgan Stanley writes.
“The shekel has lowered dollar-linked prices throughout the economy. In our opinion, the overwhelming factor driving inflation dynamics has been the shekel’s appreciation, which lowered foreign currency-linked and denominated prices throughout the Israeli economy.”
Morgan Stanley adds a note of caution. “Radical changes would shock financial markets and increase volatility. We expect the Bank of Israel to stay away from such changes and let the economy digest the cumulative effect of monetary easing so far.
“This is the first time that the country’s nominal interest rates have stood below those in the US. Although the negative interest rate differential is not necessarily a threat, its influence on residents’ portfolio allocations and short-term capital flows increases the risk of higher exchange-rate and inflation volatility.”
Morgan Stanley concludes its review by stating that the Israeli economy does not need further monetary stimulus.
Published by Globes [online], Israel business news - www.globes.co.il - on January 21, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007