Market expectations are mixed about the Bank of Israel Monetary Committee's upcoming decision on the interest rate for July, slated for release tomorrow. For the first time in its history, the Bank of Israel will hold a press conference tomorrow about the Monetary Committee's decision. Today's trading in forward contracts reflected expectations of no change in the interest rate, which has been at an all-time low of 0.1% since March, for the next 12 months. Capital market inflation expectations for the next 12 months rose to 1% last week, reaching the lower end of the government's target range. The market also predicts that Governor of the Bank of Israel Karnit Flug would prefer to wait until the uncertainty about Greece remaining in the euro bloc clears up. If the issue is settled in the next few days, an interest rate cut will become much less necessary. "Flug has one bullet left in the barrel (an interest rate cut) and one in the magazine (quantitative easing)," a key capital market player told "Globes." "There's no reason to hurry to shoot tomorrow when the following day may show that it's unnecessary." On the other hand, the shekel's strengthening against the dollar in recent days supports another interest rate cut. Today's exchange rate of the shekel against the effective basket of currencies is 1% above its level on the eve of the most recent interest rate cut, which is liable to hamper the recovery of Israeli exports, a source of rising concern.
Meitav Dash chief economist Alex Zabezhinsky said today, "It is very probable that the Bank of Israel will lower the interest rate in its meeting this week and/or adopt other expansionary monetary measures." Zabezhinsky bases his assessment on the revised GDP figures for the first quarter published by the Central Bureau of Statistics last week. The most substantial revision was in the foreign trade figures, with exports being revised from 3.1% growth in the original estimate to a 6.2% decrease in the revised figures. Investment was also downwardly revised from -5.8% in the original figures to -6.5%. According to Zabezhinsky, the revised figures indicate that "growth in Israel is very unbalanced, relying to a large extent on private consumption, while the other GDP components are weak." Psagot Investment House Ltd. chief economist Ori Greenfeld agreed with this assessment last week, writing, "There is no doubt that the revised figures make an interest rate cut/foreign currency purchasing more likely, and exacerbate the headaches endured by the members of the Bank of Israel Monetary Committee. On the one hand, the unemployment rate is as low as can be, but on the other hand, the shekel is strong and exports are falling. If this trend continue, it will penetrate the employment market sooner or later, and is likely to bring about a slowdown in economic activity."
Published by Globes [online], Israel business news - www.globes-online.com - on June 21, 2015
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