Baclays Capital calls this week's interest rate hike by the Bank of Israel's "surprising to most", but points out that the move proves that central banks who cut interest rate most aggressively "are expected to initiate, early, a process of normalization." Israel still has negative real interest rates.
Barclays Capital Analyst Christian Keller says that the research team expected the BoI to remain on hold, like most in the market. Consequently, the hike sparked a rally in the shekel. Keller adds that the Bank of Israel's statement following the decision was "very positive reading" about recent growth performance, as Israel's economy progresses from what started as an export-led recovery.
Keller see economic growth at 0.8% for 2009, and at least 3% for 2010 - with potential upside risk. Regarding inflation, Keller says that over the coming months "it is likely to drift up above 3% as base effects turn unfavorable; however, we expect it to fall back thereafter toward the mid-point of the target 1-3%."
The investment house says that US GDP figures show a recovery in investment in software and equipment, so economies with big exposure to the high tech sector, such as Israel and Taiwan, are showing clear signs of recovery. Israel's GDP grew at a 2.2% annualized rate in the third quarter, and Taiwan's industrial production grew 6.6% year over year in October.
Barclays adds that recent weakness in the shekel enabled the Bank of Israel to raise rates without overly worrying about shekel appreciation. The bank expects that Israel will continue its process of normalization going into 2010. The investment house says the next rate increase will only materialize in January 2010, and says that as the timing of the rate hike suggests that current levels of the shekel are acceptable to the Bank, they remain long the shekel.
Published by Globes [online], Israel business news - www.globes-online.com - on November 26, 2009
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