'Era of monetary easing behind us,' economists say

Investment houses were in consensus that the central bank would keep interest rates steady at 3.5% on Monday following seven reductions in the last eight months.

By SHARON WROBEL
June 25, 2007 07:58
2 minute read.

With the shekel falling to a three-month low versus the dollar last week and inflationary pressures expected to continue building up over the coming months, the Bank of Israel is likely to leave July interest rates unchanged at 3.50 percent when rates are announced on Monday (today). "The era of monetary loosening is behind us," said economists at Leader & Co. "Inflationary pressures are on the rise as domestic demand is increasing. The market will therefore be carefully watching the phrasing of the statement of the interest rate decision on Monday for any indications of how close the central bank is to raising its key lending rate or whether the bank feels inflationary concerns are under control. A "threatening" statement could calm down the shekel - meaning that if monetary tightening is imminent, the shekel should strengthen for the short-term." Investment houses were in consensus that the central bank would keep interest rates steady at 3.5% on Monday following seven reductions in the last eight months. Economists at Union Bank forecasted that the central bank would begin increasing the local key lending rate from the first quarter of 2008. "Following the publication of the consumer price index (CPI) for May, which was unchanged against expectations that it would fall, and the continuing strengthening of the dollar, we expect the Bank of Israel interest rate for July, published on Monday, to remain unchanged," said Union Bank in its weekly review. Over the past year and a half, the shekel has continued to strengthen while the dollar has weakened, causing millions in losses to exporters. Meanwhile, inflation has remained negative. The central bank has been continuously cutting interest rates over the past year to halt the shekel's rally in an effort to bring inflation back into the middle of the price target range of between 1-3%, but without much success until last month. The shekel continued to appreciate against the dollar despite the rate cuts, rising as high as NIS 3.94 in mid-May, the highest official exchange rate in over seven years. Over the past few weeks, the shekel has depreciated, weakening against the dollar by about 7.5%, leaving the shekel-dollar exchange rate at NIS 4.23 on Sunday. "There is no reason for the Bank of Israel to cut interest rates as inflation expectation for the 12 months ahead were revised upwards of 2% and above. This in line with the central bank's price target range," said Shlomo Maoz, chief economist at Excellence Nessuah. "In addition, foreign investors are moving out of Israel and out of the emerging markets partly because of the large interest rate gap between Israel and the US," he added. Economists at Bank Leumi added that the security tensions in the Gaza Strip may also contribute to a weaker shekel. "We expect the shekel-dollar exchange rate to stabilize around the new current range for the short and medium term unless the security or geopolitical situation worsens," said Bank Leumi. Union Bank expects the shekel-dollar rate this week to range from NIS 4.07 to the dollar to NIS 4.245 as the dollar continues to gain strength around the world. Last week, a senior analyst at a Tel Aviv investment firm said that from a technical standpoint, the exchange rate should hover between NIS 4.1 and NIS 4.22 per dollar. If the rate breaks through the NIS 4.22 barrier, this could bring it to the next resistance level of 4.24," said the analyst.


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