March interest rate expected to remain at 4.25%

Comes despite pressure from local industry urging cut in base lending rate to ease shekel's strength and preserve exporters' competitive position.

bloom graph 88 298 (photo credit: Bloomberg)
bloom graph 88 298
(photo credit: Bloomberg)
Despite pressure from local industry urging a cut in the base lending rate to ease the shekel's strength and preserve exporters' competitive position, the Bank of Israel is widely expected to leave interest rates unchanged next week. "Core inflation is on the rise, which will prevent the central bank from lowering interest rates next week," Excellence Nessuah chief economist Shlomo Maoz told The Jerusalem Post Thursday. "But in view of the low global interest-rate environment and a global slowdown, as compared to Israel's good economic position in terms of its fiscal and current-account surplus, the Bank of Israel should cut interest rates by 1 to 2 percent over the next months to preserve the industry's competitive power." The central bank's concern is that lowering interest rates from the current 4.25% could ease the appreciation of the shekel and raise inflation, he said. A central bank survey of analysts published this week showed that inflation will slow to 2.5% in the next year, within the range of the 1% to 3% of the government's price target, down from last year's 3.5%. Analysts surveyed by the Post forecasted that inflation in the next 12 months would be within the range of 2% to 2.8%. "The Bank of Israel's main target is to weaken or break the 'go-through,' or strong correlation between the shekel-dollar exchange rate and inflation by reducing dollar-linked pricing," Maoz said. "Once it comes closer to this goal, its inflation and interest-rate policy could become more flexible." Prisma Investment House Ltd., in consensus with most investment houses, forecasted that the Bank of Israel would keep its base lending rate at 4.25% at the upcoming monetary policy meeting on Monday. Prisma based its prediction on the fact that the Consumer Price Index (CPI) was unchanged in January. The Central Bureau of Statistics published the CPI figures last Friday. Prisma recommended that the Bank of Israel not make unnecessary experiments by cutting the interest rate, a move that could accelerate inflation and force the central bank to again raise the interest rate. Citigroup also expects interest rates to remain unchanged as the "inflation overshoot" continues. "We feel that Friday's [CPI] data - and especially the fact that the overshoot of the inflation target continues - cement the case for an unchanged policy stance by the Bank of Israel, despite pressure for a cut from some industrial and political sources," Citigroup's Jean-Francois Mercier said this week in a research note to investors. Last week, Bank of Israel Deputy Governor Zvi Eckstein said current economic conditions had enabled the central bank to keep the interest rate unchanged at 4.25% as macroeconomic stability and policy clarity supported continued GDP growth of 4% to 5% a year. "Inflation will come back within the 1% to 3% target range only in the second half of the year," he said. Earlier this month, in response to growing pressure from manufacturers and exporters to cut interest rates to ease the shekel rally, Bank of Israel Governor Stanley Fischer said the central bank would refrain from cutting interest rates as long as inflation remained high and economic growth was stable. Last week, the shekel rose to a 10-year high of 3.5325 against the dollar, and was the best performer among emerging-market currencies in Europe, the Middle East and Africa over the past month. Should inflationary pressures abate, Fischer said, there might be room for an interest-rate cut. He reiterated that the central bank would not intervene in the foreign-currency market in an effort to ease the shekel's strength. "Evidence from the inflation data, which show no sign or price pressures of easing despite the strong shekel, and Thursday's external trade data, showing still-high export levels in January, probably will strengthen the governor's resolve," Mercier said. But Prisma, on speculation inflation will slow, allowing the Bank of Israel to cut interest rates in the coming months, estimated that the probability of an interest-rate cut during the second quarter had risen. The investment house said last year's inflation rate of 3.5% had left the Bank of Israel with little room to maneuver.