“We do not expect to see a change in the Bank of Israel’s interest rate tomorrow. The Bank of Israel has identified a certain improvement in economic activity at the beginning of the fourth quarter; the October Consumer Price Index was surprisingly high (speaking broadly, across most index measures), housing prices continue to rise, and the shekel has remained stable (relative to the currency basket) since the last interest rate decision,” say Yonatan Katz and the research team at Leader Capital Markets Ltd. (TASE:LDRC) in their weekly macro review.
According to their estimates, foreign currency purchases (and not reducing the interest rate) will probably become the Bank of Israel’s main monetary tool to control the shekel’s appreciation, as was the case last Thursday.
The bond market prices in high negative inflation in the coming months (as does the research team at Leader), which is why there is a preference for shekel-denominated instruments. Furthermore, they say, “for fixed-interest investors looking a year forward, inflation projections have dropped to the unreasonably low level of about 1%.”
Most macro factors encourage low inflation, including the continuing drop in commodity prices, the appreciation of the shekel of the past year, stagnation of real wages, and the possibility of tax cuts in 2014. Nevertheless, “we expect the rent item in the Consumer Price Index to rise 4.5% in the coming year, and to contribute 1.2% to inflation,” the analysts write.
Published by Globes [online], Israel business news - www.globes-online.com - on November 24, 2013
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