stanley fischer 311.
(photo credit: Courtesy)
Bank of Israel Governor Stanley Fischer surprised investors with an unexpected
rate hike on Tuesday, raising rates by 0.5 percent to 3%.
represents the third consecutive rate hike in the last three months and stems
from rising inflation expectations.
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
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
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.
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
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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