Fischer poised to raise rates by quarter-point

Sarel warns if Bank of Israel raises interest rates by 50 basis points next week, central bank would risk further strengthening of the shekel.

By SHARON WROBEL
August 23, 2007 22:29
3 minute read.
fischer biz 88 298

fischer biz 88 298. (photo credit: Ariel Jerozolimksi)

The Bank of Israel is expect to raise its base lending rate next week by a moderate 0.25 percentage points to 4%, according to economists who are cautioning the central bank not to rush into aggressive monetary tightening. "The [stock] market appears to discount a 50-basis point rate hike at next week's policy meeting, which we believe is unnecessary at this point," Daniel Rapoport, investment consultant to international investors at Leader Capital Markets told The Jerusalem Post. "We think a 25-basis point hike is the most likely scenario, in particular in view of the strengthening of the local currency in recent weeks, which should limit inflation." There is consensus among analysts and economists that interest rates would have to rise in coming months, but there are discrepancies about the speed at which past monetary easing is likely to be unwound. "Evidence that growth remains very strong in Israel, and above the economy's potential pace is likely to strengthen the case for a further increase in interest rates in coming months. At 3.75%, the policy rate is low compared with the pace of economic growth, even when taking into account very low inflation," Jean-Francois Mercier, an analyst at Citigroup, wrote in a note to clients. "But the dynamism of growth, and also of exports (even in an environment of slower demand in the US, a major trading partner for Israel) should prove equally supportive of the shekel over the medium-term. Hence, we retain our view that interest rates will probably not need to rise as much as in the previous cycle this time round." Similarly, Michael Sarel, head of the economics and research department at Harel Insurance Investments, cautioned that should the Bank of Israel decide to raise interest rates by 50 basis points next week, the central bank would risk further strengthening of the shekel. "We forecast that the central will most likely boost interest rates by 25 percentage points or leave interest rates unchanged against the background of the strengthening of the local currency and in an effort to keep inflation within the upper end of the government's price target range of between 1% and 3% over the next 12 months," said Sarel. "The market was too hasty to discount a half-point hike judging from what happened in the past when the central bank raised interest rates. Last time though we were in a situation of market volatility with the local currency weakening but now it is strengthening." The shekel on Thursday strengthened to a two-month high against the dollar. Last month, the Bank of Israel Governor Stanley Fischer unexpectedly raised interest rates by a quarter-point on the back of strong economic growth and rising global oil prices sparking inflation. "We are now witnessing a surge in inflation that could possibly move above the target range," said Serhan Cevik, an economist at Morgan Stanley, though economists surveyed by the Post disagreed. "This summer we saw inflation accelerating in August compared with last year, but we expect the surge to cool down after this month," said Rapoport. Economists at Bank Leumi said in their weekly report, that the rapid growth rate in domestic demand and in particular private consumption experienced in the first half of the year, which boosted the composite state-of-the-economy index in July to 1.1% was not expected to expand in the long term. "We expect the consumer price index for August to be up 0.4% before falling 0.7% in September partly as a result of the strengthening of the shekel," said Sarel, who estimated that without a dramatic change in the US dollar and a moderate increase in the shekel, inflation would stay within the upper range of the price stability target. "We forecast inflation to stay within the upper level of price target range at 2.1% over the next 12 months," he said. Looking ahead, Sarel and Rapoport agreed that it was reasonable for the central bank to cautiously raise the benchmark lending rate over the next six months to 4.25% or 4.5%, while Cevik expected rates to head towards 4.75%-5%.


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