Yesterday, the Bank of Israel cut the interest rate for October by 25 basis points to 1% from 1.25% in September. In September 2011, the interest rate was 3.25%, and it has been falling ever since. At the same time, the Bank of Israel also published its updated growth forecast of 3.6% for 2013.
Halman Aldubi chief investments manager Ilan Artzi says, "The Bank of Israel decided not to wait for the selection of a governor, and cut the interest rate by 25 basis points. Even though the latest growth figures were fairly good, it seems that the Bank of Israel wants to respond to the strengthening of the shekel in the past few days, and it still fears a slowdown in the Israeli economy. In addition, Federal Reserve Board Chairman Ben Bernanke's comments last week and his decision not to end the bond purchasing program raise concern about a global slowdown that will also affect the domestic economy. In our opinion, this was a courageous and correct step by the Acting Governor in view of the fact that the process of appointing a governor is still dragging out."
"The Bank of Israel again decided to be the leader instead of the led, when it chose to cut the interest rate by 25 basis points, thereby making it less worthwhile to gamble on the exchange rate," comments Prico Risk Management and Investments CEO Yossi Fraiman. "By narrowing the interest rate gap between Israel and foreign markets, the Bank of Israel's Monetary Committee intends to reduce the supply of foreign currency, and even encourage renewed demand for dollars. In view of the Acting Governor of the Bank of Israel's decision, the shekel is again weakening against the dollar, and the exchange rate is above NIS 3.53/$. The Bank of Israel's move cannot be an isolated act that will change the appreciation of the shekel and the continuing damage to the profitability of exports and the future of Israeli industry. A broader move is needed that will ensure profitability of exports and prevent a flooding of the domestic market with competing imports."
Menorah Mivtachim Investment House chief economist Haim Natan says, "We believe that the Fed's unexpected decision not to taper the rate of bond purchases was an important part of the present decision. However, in our opinion, the fact that the Bank of Israel is unable to maintain the exchange rate at the level that it sees proper is not enough to explain the interest rate cut. An interest rate cut in an economy that is close to full employment, and when despite all of the Supervisor of Banks' steps, home prices continue to soar (9.3% in the past 12 months), does not appear to be correct. We believe, among other things on the basis of the Research Department's forecast that was published today, this will be the low from which the interest rate will presumably rise."
Harel Insurance and Financial Services chief economist Ofer Klein says, "The likelihood of another interest rate cut in the foreseeable future is very low. In the coming months, the Bank of Israel (like the other central banks in most developed countries) will probably wait for the next decision by the Fed (in December) on the tapering of quantitative easing, and will review the consequences of it for economic performance and the leading currencies."
The market is only partly incorporating the interest rate cut
Psagot Investment House chief economist and strategist Ayelet Nir says, "In the absence of inflationary pressures, and given the Central Bureau of Statistics and Bank of Israel's forecasts of lower growth in 2013 compared with previous forecasts, the factor that will most affect the Monetary Committee's decision is the shekel's exchange rate against the basket of currencies, which is the factor weighing on economic growth. Although the shekel depreciated today, the depreciation can be explained by investors' forecasts of the interest rate cut, so that a decision not to cut the interest rate could have caused a sharp correction in the currency. What's next? The reason for the latest interest rate cut is the strengthening of the shekel. Without this strengthening, the interest rate would probably still be 1.75%. It is hard to predict whether the narrowing of the interest rate gap to the current level will be enough to greatly weaken the forces that are strengthening the shekel. Nonetheless, given that, in the longer term, the Fed is expected to taper its quantitative easing, a step that could further narrow the yield gap between the economies, we give a higher probability to no change in the monetary rate in the coming year."
Alfa Platinum Mutual Funds VP investments Assaf Shaul says, "The Bank of Israel has used the last bullet in its magazine, and cut the interest rate by 25 basis points to 1%. This means that the next governor will have a harder job because the interest rate weapon is used up, and the next stage will have to be more creative. The main reasons for the interest rate cut are the Fed's postponement of the tapering of quantitative easing and the shekel-dollar exchange rate, which reached NIS 3.50/$. Weak economic and industry growth data also contributed to the calculations in favor of the interest rate cut. The market has only partly incorporated the interest rate cut, and we will therefore see higher bond and stock prices."
Published by Globes [online], Israel business news - www.globes-online.com - on September 24, 2013
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