"Israel is in excellent shape. The strong shekel is a reward for the country's strong economic performance since the start of the global crisis, but it is becoming an obstacle for further growth in the short term," S&P chief EMEA economist Dr. Jean-Michel Six told "Globes". Six is in Israel to speak to top analysts at Standard & Poor's Maalot Ltd.
Six added, "The shekel's strength is basically recognition of the strength of the Israeli economy, especially the financial sector, which is extremely important in the current environment. Therefore, monetary policy will probably be tighter in Israel, even before it becomes tighter in the rest of the world, because the economy is functioning well and inflation is liable to again rear its head."
"Globes": How does this affect monetary policy?
Six: "It's a paradox for the Bank of Israel. The strong shekel is compensation for performance, but conversely, it burdens Israeli exports to Europe, and to a lesser degree to the US. The strong shekel is a problem in the short-term. An additional problem affecting the Israeli economy is the crisis in Israel's main export markets, especially in Europe.
"In my opinion, this is a factor that will lead growth forecasts for Israel over the next 18 months."
Will this affect Israel's growth rate?
"We expect an average of 3% growth this year and next. This is strong growth, and there's nothing to complain about. Many countries would be happy to have such growth. But this forecast is fragile, because we're worried about economic developments, especially in Europe."
While Six is worried about the condition of Israeli exports to Europe, he is more relaxed about another target market, the US, because of the structure of exports to it. "Exports to the US comprise many IT and other high-tech products, which are less sensitive to currency fluctuations. So even if the shekel strengthens, there is less effect on these products, which the Americans buy because they are high quality and, most of all, are needed by them."
When will we see interest rate hikes becoming relevant again?
"I think that it will take not a short time until the European Central Bank begins raising the interest rate. In Israel, I wouldn't be surprised if the interest rate were raised by year-end. The Israeli economy is growing faster than in other European countries, and this will continue over time. Therefore, the interest rate gap should widen before it narrows again."
What is your forecast for Israel's interest rate in 2010 and 2011?
"I believe that we'll see the interest rate rise by another 25 basis points this year and by 50 basis points by mid-2011. This is not an end-of-the-world hike, but it will widen the gap between Israel and the US, because don’t forget that we're talking about economies with zero interest rates. Interest rate hikes elsewhere in the world, such as in Europe, are unlikely before the second half of 2011."
Published by Globes [online], Israel business news - www.globes-online.com - on June 27, 2010
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