Economists split on interest rate decision [pg. 15]

By DANIEL KENNEMER
April 24, 2006 10:16
2 minute read.

 
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With the Bank of Israel widely expected to raise the shekel interest rate a further 0.25 percentage point Monday evening, analysts are split as to whether the hike is justified. Governor Stanley Fischer should keep the shekel interest rate at its current 5-percent level, "even if it becomes equal to the American interest rate on May 10, when the [US Federal Reserve] raises [the dollar] interest rate to 5%," Excellence Nessuah chief economist Shlomo Maoz said Sunday. "There is no justification to raise the interest rate." Among factors mitigating against another rate hike, Maoz listed stagnating first quarter exports; a rise in the first quarter trade deficit due to increased imports of consumer goods; a drop in imports of investment products; a fiscal surplus totalling 1.5% of GDP in the first quarter; stability in financial markets (including yields on government bonds and other bonds); the current 8.7% unemployment rate; hints the Fed is approaching the end of its interest rate-raising cycle; and the renewed flow of foreign investment into Israel. Both the rising fuel price globally and the rising interest rate would affect Israel's economy, Maoz noted. Psagot Ofek Securities economist Eran Dolev, on the other hand, said Fischer may "have no choice but to raise rates," since inflation was higher than expected the past three months, though he might wait until next month to do so. Leader Capital Markets, meanwhile, predicted that both the decision and the coalition building process would make waves in the bond market. "The appointment of [Labor head] Amir Peretz as Defense Minister will be understood as a positive [signal], but coalition deals are likely to be of concern, particularly with regard to raising the minimum wage," the investment house said Sunday. "The Bank of Israel decision tomorrow is not an easy one." Factors weighing in favor of further hikes are rises in core inflation, which brought total inflation over the past 12 months to 3.6%, in addition to the anticipated Fed rate raise. "On the other hand, the shekel is gaining strength and foreign trade figures indicate a slowdown in both exports and imports." Leader predicted Fischer would raise rates to 5.25%, adding that "in any event, we still expect the Bank of Israel interest rate to rise to 6% by the end of the year." Four out of five economists surveyed by Bloomberg expect the central bank to raise its rates for commercial banks to 5.25% Monday evening, the sixth such increase since September, bringing the rate up from a record low of 3.5%. Fischer has raised rates principally to maintain the differential with US borrowing costs and underpin the shekel.

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