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Israel Interest Rate Swaps to Drop as Rate on Hold, Barclays Capital Says

Israeli five-year interest-rate swaps may fall to 3.5 percent as the central bank holds its benchmark lending rate until October, according to Barclays Capital.

“While the Bank of Israel will likely continue to gradually tighten monetary policy, a moderating inflation rate as well as a more fickle global environment suggests a slower pace of rate hikes,” Daniel Hewitt, a London-based senior economist at Barclays, said yesterday in an interview. The central bank “is particularly sensitive about the global risk environment.”

Hewitt recommends receiving five-year interest rate swaps under current conditions as investors lock-in fixed payments on bets floating rates will decline as the central bank slows the pace of interest rate increases.

The five-year swap rate, or cost to fix five-year payments, started climbing in early 2009, before interest rates rose to the current 1.5 percent level. The rate was at 3.64 percent yesterday, according to Bloomberg data, declining about 90 basis points from the 4.53 percent peak in January on bets the pace of rate increases would slow on concern the global economic recovery is faltering.

Fischer held the benchmark interest rate on June 28 for a third month as economic growth slowed to 3.6 percent in the first quarter from 4.5 percent the previous three months. Export data have been lower than expected and there is some concern that economic growth this year may be below the Bank of Israel’s 3.7 percent forecast, Fischer said July 1.

The Finance Ministry on June 6 lowered its growth forecast to 3.6 percent, citing the debt crisis in Europe, Israel’s main export market along with the U.S.

To contact the reporter on this story: David Wainer in Tel Aviv at dwainer1@bloomberg.net

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