UBS believes the Bank of Israel will leave the interest rate unchanged in its next decision due on September 22. However, UBS believes the Bank of Israel will be unable to avoid a further interest hike at some point in the year. "While the Bank of Israel might be forced September, we think the more likely time would be 27 October. At that time, the September inflation data will be available, which in our view, are likely to show a rise above 5.5% year-on-year again - excessively high vis-à-vis the 1-3% target," it concludes.
After the central bank raised the interest rate in August, "The subsequent Bank of Israel statement indicated, in our view, that the central bank is not keen to hike rates further. Real GDP growth slowed to 4.2% in the second quarter of 2008 from 5.6% in quarter-on-quarter annualized terms, with a marked deceleration in household consumption and fixed investment."
UBS expects a 25 basis point hike in the interest rate in the fourth quarter.
UBS does not share the Bank of Israel's optimism over the return of inflation to the target range within a year. "Although the Bank highlights that wage growth is continuing at a relatively rapid pace of 4.6% year-on-year, it is confident that inflation will drop back into the 1-3% target range ‘already’ in the second quarter of 2009. We remain more skeptical," it says. "According to our forecast, inflation will not drop back into the target range before the third quarter of 2009, but inflation dynamics could turn out to be even worse if the shekel were to lose further ground against the dollar, in the context of the ongoing dollar recovery. The 5.4% depreciation of the shekel in August could already trigger unpleasant inflation surprises in the upcoming data releases."
Published by Globes [online], Israel business news - www.globes-online.com - on September 14, 2008
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