April “was the second consecutive month that the rate has been lower than the growth rate in previous months,” the Bank of Israel said in its synopsis of the State of the Economy Index, which examines seven aspects of real economic activity, including trade and business-sector employment. “Notable declines” were posted in goods exports, imports of manufacturing inputs and industrial production, it said.
The last time the central bank pared borrowing costs, on Feb. 24, it cited the slowing economy. The April “S” index, which gained 0.04 percent, reinforced that direction.
“It’s another indication that they have to cut the rate,” said Ofer Klein, head of economics and research at Harel Insurance & Financial Services Ltd., listing inflation, inflation expectations and first-quarter growth figures among the indicators supporting a reduction. “Also, the market is already pricing in the rate cut.”
The yield on the benchmark bond due March 2024 declined 1 basis point to 2.95 percent at 3:05 p.m. in Tel Aviv. The shekel has declined by 1.1 percent, to 3.4852 to the dollar, since May 8, when it reached its strongest in almost three years. One-year interest rate swaps were unchanged May 23 at 0.56 percent.
Economic growth slowed to 2.1 percent in the first quarter from 2.9 percent in the previous three months, and according to a central bank forecast in March, will decelerate to 3.1 percent this year from 3.3 percent in 2013. Annual inflation unexpectedly slowed in April to 1 percent, the lower limit of the government’s target band. Inflation expectations 12 months out declined to 1.3 percent, from 1.6 percent the previous month the central bank said May 19.
Majority Forecast Hold
With the economy performing sluggishly, 10 of 19 economists surveyed by Bloomberg last week predicted the Bank of Israel would hold its benchmark interest figure at 0.75 percent. Eight predicted a quarter-point cut to 0.5 percent, and one predicted the rate would be trimmed to 0.6 percent. Barclays Plc, which four weeks ago had predicted the reductions were “all finished,” saying “growth isn’t doing too badly,” is among those now forecasting the central bank will pare.
The Psagot Investment House Ltd. said 65 percent of the “hundreds” of investment advisers it surveyed this morning expect the Bank of Israel to hold borrowing costs steady. The rest estimated the central bank would pare by a quarter percentage point.
“The Bank of Israel will cut the interest rate in the coming months, though not necessarily tomorrow,” said Psagot’s chief economist, Ori Greenfeld. “Because the bank hardly has any monetary ammunition left, it may wait to see if the latest data are revised slightly upward before reducing the rate again.”
The Bank of Israel has reduced the benchmark interest rate 10 times since 2011 to 0.75 percent and purchased about $9 billion in the past year to help weaken the shekel and boost the export-dependent economy.
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