Commentary: Fischer stuns investors

Bank of Israel Governor sends clear hint he is committed to achieving the official inflation target by raising rates by 0.5 percent to 3%.

By YANIV HEVRON
April 3, 2011 21:59
2 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)

 
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Bank of Israel Governor Stanley Fischer surprised investors with an unexpected rate hike on Tuesday, raising rates by 0.5 percent to 3%.

The rise represents the third consecutive rate hike in the last three months and stems from rising inflation expectations.

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With this action, the central bank sent a clear hint it was committed to achieving the official inflation target and that it would probably continue to raise rates in coming months.


Indeed, the Bank of Israel is even predicting that rates will reach 4% in the next 12 months. Despite expectations that Fischer will leave rates unchanged next month, we believe he will decide to raise rates once again in May.

The latest inflation indicators show that inflation is on the rise and that the central bank can’t really tackle the issue. Currently, it seems as if the only thing that can prevent prices from rising further is a decline in housing prices. We have therefore increased our inflation expectations and believe the consumer-price index will rise by about 3.2% in the next 12 months.

Meanwhile, the local stock exchange is showing strength despite growing unrest in the Middle East and other worrying signals abroad. Who could have imagined in advance that 2011 would open this way and that the Israeli market would stand firm? The fall of the Egyptian and Tunisian regimes, complicated reality in Bahrain and civil war in Libya have increased geopolitical uncertainty and raised risk levels. This, in turn, has pushed oil prices upward and threatened to bring global growth to a halt.

If this weren’t enough, the widening European debt crisis and the aftermath of the earthquake in Japan have only accelerated fears that the global economy will slow down. The Tel Aviv Stock Exchange has, however, demonstrated strength in comparison to markets abroad.

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The local market was lagging behind other Western markets in recent months following the rise in Israel’s risk premium and expectations that the Bank of Israel would accelerate the pace of interest-rate hikes. It seems as if local investors are gaining confidence and are using the negative sentiment to buy shares.

So, for example, the local banking sector is standing out.

Banking shares have suffered from negative sentiment since the beginning of the year, which was intensified by sales of foreign investors in the wake of recent Middle East events. Local investors believe, however, that despite the negative sentiment, the banking sector is solid and may even benefit from rising interest rates and higher inflation rates.

We believe the corporate debt market will benefit from changes introduced by the Bank of Israel’s supervisor of banks concerning the exposure of domestic banks to the loan market.

We believe the nonbank credit market will widen by as much as tens of billions of shekels following the implementation of the new restrictions.

Yaniv Hevron is the head of macroeconomics and strategy at Excellence Nessuah investment house.

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