'Local tightening less likely after rate cut'

The Fed was expected to cut the Federal funds rate to 5% from 5.25% but the US central bank instead made a surprise deeper cut of half a percentage point.

September 20, 2007 07:46
2 minute read.


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Following the aggressive action by the US Federal Reserve on Tuesday to lower interest rates by 50 basis points, economists say the Bank of Israel will likely end its monetary tightening policy of recent months when it releases its decision on rates for October next week. "Before the Fed's decision, we expected the Bank of Israel to raise interest rates by another 0.25 percentage point by the end of the month in reaction to sharp increases in electricity and oil prices, boosting the costs of production and services and inflationary pressures," Ayelet Nir, chief economist at IBI Investments House, told The Jerusalem Post. "After the Fed's decision, we expect the base lending rate of the Bank of Israel to remain unchanged at 4% in the coming months, supported by a strengthening shekel as a result of the weakening of the dollar around the world and a closer interest rate par with the US." Similarly, Yaniv Hevron at Psagot Ofek Investment House said that if before the Fed's decision the probability was small that Bank of Israel Governor Stanley Fischer would raise interest rates by the end of the month, now there was zero probability. The Fed, under the leadership of Ben Bernanke was widely expected to cut the Federal funds rate to 5% from 5.25% but the US central bank instead made a surprise deeper cut of half a percentage point to both the Fed funds rate and the discount rate. Dani Fishman, managing partner at Tamir Fishman Investment House said the move sent a clear signal to the market that the economic situation was worse than what was anticipated and showed that the fear of a recession was growing over the concern of inflationary pressures. "Economists are in consensus that the 0.5 percentage-point interest rate cut will help stabilize the capital markets in the short-term but it will not be able to cure the disease in the US economy," he said. Economists at Bank Leumi, meanwhile, said they expected the Fed to continue lowering interest rates to the effect of a complete closure of the negative interest rate gap between the US rate and the Bank of Israel rate within a year. Following the Fed's decision, the dollar on Wednesday dropped over 1% to a three-month low of NIS 4.05 against the shekel. "The Bank of Israel is now expected to leave interest rates unchanged for the next six months as the shekel continues to gain," said Shlomo Maoz, chief economist at Excellence Nessuah. "We are already near the next psychological barrier of the shekel/dollar exchange rate of NIS 4. Over the next few months we could see the shekel/dollar exchange rate drop below NIS 4 to NIS 3.80, at which level the Bank of Israel could start easing its monetary policy by the beginning of next year."

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