Analysts expect interest rates to rise soon

Heightened pressure to curb rising housing prices and recent strong domestic economic data could prompt change.

September 16, 2010 22:34
2 minute read.
The Bank of Israel.

The Bank of Israel.. (photo credit: Ariel Jerozolimksi)

Investment houses expect the Bank of Israel to raise October interest rates by the end of the month in light of heightened pressure to curb rising housing prices and recent strong domestic economic data.

“The central bank will feel under increasing pressure to supplement recent prudential measures to curb rising house prices with additional policy rate hikes in the coming months,” Credit Suisse analyst Ivailo Vesselinov said in a report this week. “We continue to believe that the Bank of Israel will implement two further 25-basis-point rate hikes to 2.25 percent by year-end.”

“Our central scenario had envisaged that the first of these would be implemented at the end of October,” he said.

“But given the recent strong domestic economic data and the ongoing rise in housing prices, we see a risk that [Bank of Israel Governor Stanley] Fischer could deliver a 25-basis-point rate hike at the next policy meeting on September 27.”

Fischer would not rush to tighten monetary policy aggressively at this stage, given the still-fragile nature of the global economic recovery and widespread expectations that the European Central Bank and the US Federal Reserve will keep their policy rates on hold for an extended period, Vesselinov said.

Fischer left interest rates unchanged for September after raising the benchmark rate at the end of July by a quarter- point to 1.75%, the first increase in four months, in an effort to stem a surge in housing prices.

Consumer prices in August rose by 0.5%, according to data published by the Central Bureau of Statistics on Wednesday. Year-on-year inflation stayed unchanged at 1.8% in August, above the mid-range of the government’s price-stability target of 1% to 3%. Housing prices were up 1.7% month-on-month in August, after a 1% month-on-month rise in July.

“The August CPI was an unpleasant surprise to the market and raises the chance of a rate hike at the end of the month,” Citigroup analyst David Lubin said in a report this week. “The rise in the CPI during the month of August was partly thanks to a 1.7% rise in the housing CPI and a 0.9% rise in food prices. Although the Bank of Israel is likely to be relatively unconcerned about rising food prices (which is presumably thanks to the global rise in food inflation during the third quarter), the housing market is of more concern to the central bank, as Fischer has made clear on a number of occasions.”

Citing rising consumer confidence and strong expectations about economic activity, Citigroup also expects the Bank of Israel to raise the interest rate by 25 basis points to 2% at the end of the month.

“The only argument against a rate hike this month is the strength of the shekel,” Lubin said. “But since the Bank of Israel is used to the combination of hiking rates and buying foreign currency simultaneously, we don’t think currency strength will be an obstacle.”

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