Citi says that the Bank of Israel's failure to raise rates on Sunday could be taken by the market as a sign of inconsistency.
Citi Capital Markets believes that, after unexpectedly keeping the interest rate for May unchanged at 3% on Sunday, the Bank of Israel's upcoming additional measures in the housing credit field will "need to be pretty aggressive to keep the Bank's behavior credible." Citi says that the Bank of Israel's failure to raise rates on Sunday could be taken by the market as a sign of inconsistency, and that could create some upside risks to inflation expectations.
Citi analyst David Lubin notes that he was among the analysts who had predicted that the Bank of Israel would raise the interest rate by 25 basis points, because inflation is currently running at 4.3%, way above the 3% target ceiling, and inflation targets indicate that inflation will stay above the ceiling for the rest of 2011; economic activity seems very robust; and the housing and labor markets still seem tight.
Lubin says that the Bank of Israel seems to have a two-fold strategy, relying on the shekel and on macro-prudential measures. He says that Bank of Israel's argument in favor of unchanged rates on Sunday seems to hinge considerably on the impact of the recent appreciation of the shekel and that it is probably also counting on the impact of (as-yet-unannounced) measures to squeeze mortgage credit.
Published by Globes [online], Israel business news - www.globes-online.com - on April 26, 2011
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