Merrill Lynch sees BoI cutting interest rate

Analyst Mai Doan does not see the depreciation of the shekel being sufficient to offset declining export demand.

30 July 12 13:01, Globes correspondent

Analyst Mai Doan of Bank of America Merrill Lynch sees a 25 basis point in the Bank of Israel's key interest rate as likely this month. Merrill Lynch recently lowered its growth forecast for the Israeli economy from 3% to 2.7% for 2012, and from 3.3% to 3% in 2013, "due to disappointment in export data and further deterioration in the global outlook". Doan believes that the Bank of Israel will lower its interest rate despite recent weakness in the shekel, which he sees continuing in the months ahead, as the shekel's depreciation will not be sufficient to offset a decline in demand for Israeli exports. "Downside risks to our already pessimistic US and Eurozone growth forecasts bode ill for foreign demand for Israeli goods," Doan writes, and projects that " export growth will likely disappoint the BoI's current forecast of 6% in 2013, in our view".

As far as the domestic front is concerned, Doan writes that "domestic data have been mixed but generally consistent with a softening trend." Doan does not see inflation as a factor that will inhibit the Bank of Israel from taking monetary easing steps. "Several sources of upward price pressures have emerged in recent weeks: the government announced last week tax hikes on beer and tobacco products and is discussing a VAT hike from 2013; oil price in shekel terms has risen by c.27% since end-June, while global food prices have also risen sharply. However, we expect the BoI to look through the spike in CPI, as second round impact will likely be contained in view of softening in domestic activity. This is confirmed by a low June CPI reading (1%) and the broad based moderation in its components, as well as the steady downtrend in inflation expectations. The government's budget tightening measures have also helped ease Governor Fischer's earlier concerns about a loosening fiscal stance that would constrain monetary policy room," Doan writes.

In general, Doan sees support for the shekel waning, citing, besides a likely interest rate cut, "weaker balance of payments dynamics, uncertainty in domestic politics and increasing geopolitical risks."

Published by Globes [online], Israel business news - www.globes-online.com - on July 30, 2012

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