Interest rates expected to drop 0.5%

Fischer indicates if rates drop toward zero, central bank might resort to quantitative easing, purchasing bonds or intervention in credit markets.

By SHARON WROBEL
February 12, 2009 23:54
2 minute read.
Interest rates expected to drop 0.5%

Stanley Fischer Good 88 248. (photo credit: Ariel Jerozolimski)

 
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Local investment houses expect the Bank of Israel to follow the trend of global interest-rate cuts and lower the base lending rate by 25 to 50 basis points at the end of the month. "We expect the Bank of Israel to cut rates by another 50 basis points to 0.5 percent on February 23, thus bringing the easing cycle to an end, only marginally above the level of Fed funds [0%-0.25%]," Reinhard Cluse, an analyst at UBS Investment House, said Thursday. "Following the 75-basis-points cut to 1% in late January, the decline in inflation expectations, negative news on the external environment, and the substantial rate cuts across the globe, the central bank left the door open for further rate cuts." Bank of Israel Governor Stanley Fischer indicated that if rates were to drop toward zero, the central bank might resort to unconventional monetary-policy tools, such as quantitative easing, the purchase of bonds or intervention in the credit markets," he said. According to economists at Direct Investment House, "In light of massive interest-rate cuts around the world, the heavy impact of the global crisis on the local economy and an expected deflation, we are expecting interest rates to come down to 0.25%-0% as indicated recently by the governor. This month we expect the central bank to lower interest rates by 0.25% to 0.75%." The economy was entering a deep recession that is expected to last for two years, leading to a sharp rise in unemployment of 8% this year and 10% in 2010, the Direct Investment House economists said Thursday. "Tax-collection revenues are dipping as well as exports, which fell by 20% in the last quarter of 2008 compared with the same quarter the year before," they said, forecasting 0% growth this year. "On the basis of the current state budget, we expect the government deficit in 2009 to rise to 6% of GDP, compared with the Treasury's forecast of 1% of GDP, mainly because of a massive drop in tax revenues, which fell 16.5% in January, and the financing costs of the Gaza offensive - NIS 3.5 billion," the Direct Investment House economists said. According to analysts at the Economist Intelligence Unit (EIU), an affiliate of The Economist magazine, with the economy expected to slow and other sources of inflationary pressure beginning to diminish, the Bank of Israel was likely to maintain a looser stance on monetary policy, while inflation should still decline in 2009 and 2010. The EIU, in its monthly global report for The Economist, lowered Israel's growth forecast following a downward revision of its forecasts for OECD growth. "The downturn will hurt demand for Israel's exports," it said. "We now expect real GDP growth in Israel to reach just 0.9% in 2009 and to rise to 2.7% in 2010." The EIU's outlook is much more optimistic than forecasts by the Bank of Israel, which recently cut its growth forecast for 2009 to 0.2%. The EIU report warned that because of higher spending stemming from the war in Gaza and expected stimulus measures, combined with weaker revenue as the economy slows, the fiscal deficit would widen sharply in 2009, before stabilizing in 2010.

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