M. Stanley: No reason for more rate cuts

Over the past six months, the central bank has cut interest rates 1.75 percentage points to 3.75%.

May 24, 2007 07:03
1 minute read.

Amid ongoing calls to Bank of Israel Governor Stanley Fischer from local business to continue cutting interest rates in an effort to stop the surging shekel, Morgan Stanley questioned the "wisdom" of such a strategy. "While the shekel's strength and deflationary readings tempt to experiment with lower interest rates, navigating through an uncharted monetary territory requires extra caution as well as a comforting cushion for financial markets," Morgan Stanley economic analyst Serhan Cevik wrote in a note to clients this week. "To be frank, even though fundamental gains in the Israeli economy and accommodating undercurrents in the global financial system would allow for further easing of the monetary policy stance, we may well be approaching a critical risk-reward threshold and facing the risk of higher inflation in the future." Over the past six months, the central bank has cut interest rates 1.75 percentage points to 3.75 percent. Its decision on rates for June will be released May 28. "The Bank of Israel could continue cutting interest rates, as expected, to weaken the shekel and thereby create inflation. However, we beg to differ on the wisdom of such a strategy that has so far failed to deliver its promise," Cevik said. First, he noted that the reasons behind the shekel's appreciation are not very sensitive, at least in the short run, to interest rates. Second, and more importantly he said, the economy is growing at an above-trend pace, creating real inflation pressures, so there is no fundamental reason for more rate cuts. The shekel, which reached an eight-and-a-half year high of 3.9210 earlier this month, was at 3.9675 late Wednesday.

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