Bank of Israel May Hold Interest Rate at Record Low: Week Ahead
The Bank of Israel will probably hold its benchmark interest rate at a record low for a second month, as inflation slows and the economy contracts.
The rate will remain at 0.5 percent, according to all nine economists surveyed by Bloomberg. The Jerusalem-based central bank will announce its decision at 5:30 p.m. tomorrow.
“There is no need to rush and increase rates, when the economy is contracting, unemployment is rising, and there is no real risk of inflation,” Ayelet Nir, chief economist at Israel Brokerage & Investments Ltd., said by telephone.
Governor Stanley Fischer has lowered the base rate by a total of 3.75 percentage points since October to mitigate the effects of the global financial crisis. Gross domestic product contracted by an annualized 3.6 percent in the first quarter and the central bank expects the economy to shrink by 1.5 percent this year, the worst performance since the state was founded in 1948.
The inflation rate, which was 3.1 percent in April, will probably fall to 2.7 percent during the next 12 months, within the government’s 1 percent to 3 percent target range, Nir said. After discounting for the effect of the increase in value added and purchase taxes planned by the government, inflation will slow to 1.7 percent in the next 12 months, she said.
Fischer will increase the benchmark interest rate by a quarter point by the end of the year, according to the average forecast of Israeli economists surveyed by the central bank electronic check payday advance.
Commodity Prices
“If commodity prices continue to rise, it’s likely he will raise rates a bit,” Nir said. “It will still be expansionary, but it will be higher than now.”
The shekel advanced to 3.9509 at 12:05 p.m. Friday from 4.1430 on May 15.
Citigroup Inc. and Barclays Capital both issued reports May 20 saying that the central bank is likely to decrease or stop its $100 million daily foreign currency purchases, which have weakened the shekel and helped prop up exporters. The Bank of Israel said in response that it is continuing to purchase foreign currency and has no plan to change its policy.
Last week, Israel’s benchmark 5.5 percent Mimshal Shiklit bond due in 2017 fell 1.43 shekel to 104.30, with the yield rising 24 basis points to 5.02 percent. The Tel Aviv Stock Exchange’s benchmark TA-25 Index rose 4.1 percent to 860.45. Paz Oil Co. was the top gainer for the week, adding 18 percent to close at 470 shekels.
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