Some market sources expect Bank of Israel Governor Stanley Fischer to cut the interest rate by 0.25% tomorrow to 2.75% - the lowest level ever in the country's history. Israel's investment houses estimate that by the end of 2008, the Bank of Israel will make an additional cut of 0.25% meaning that 2009 will start with an interest rate of just 2.5%. According to other experts in the market, Fischer won't make the cut this week but will cut the interest rate by 0.5% by Monday of next week, due to the difficult figures regarding lower expected growth and the sharp falls on the TASE.
Sources in the capital market expect a continuation of the new "surprise tactics" in monetary policy that Fischer has adopted over the past two months. Fischer now seems to prefer announcing rate cuts outside of the usual monthly date and as a total surprise to the capital market - as happened at the beginning of October and the beginning of November, when on both occasions he unexpectedly cut the interest rate by 0.5%. The Bank of Israel feels that this surprise tactic has proven itself and produces more effective changes than an expected cut. The Bank of Israel does not rule out additional use of this tactic, and it is therefore possible that Fischer will forego tomorrow's expected rate cut, and surprise the public on a date he feels is more suited to market needs.
Nevertheless, Fischer has every reason to cut the interest rate again. Economic growth will be low and perhaps even negative, while inflation is waning as a factor. Last Thursday, the Bank of Israel sprung a surprise by sharply lowering the forecast for growth in 2009 from 2.7% to just 1.5%, meaning that there would be, according to the Bank of Israel, negative per capita growth. Several hours later, the State of the Economy Index was published, showing a real decrease in economic activity. Export figures were also particularly bad, with news of a fall after five years of constant growth, including a significant decrease in high-tech exports.
Inflation, which until recently deeply concerned the Bank of Israel, has now disappeared due to falling demand, both domestically and mainly overseas. According to estimates in the capital market, the CPI index readings for the next three months will all be negative, meaning that the government will achieve the lower end of its 1-3% target range for annual inflation.
Any expected announcement tomorrow may also be influenced by the composition and content of a financial assistance package that the Ministry of Finance is expected to present in the coming days.
Published by Globes [online], Israel business news - www.globes-online.com - on November 23, 2008
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