The Federal Reserve’s decision to scale back monetary stimulus is spurring bets the Bank of Israel has come to the end of an easing cycle designed to promote growth and rein in the shekel.
Israeli policy makers, who held the benchmark rate at 1 percent today, have said a reduction in Fed stimulus would signal that global easing is reversing course. The Fed’s decision last week to taper its bond purchases backs Goldman Sachs Group Inc.’s expectation that the Israeli central bank will keep interest rates unchanged for much of next year before reversing course, the investment bank said.
The Fed’s decision “supports our rates forecast and ‘should’ have a meaningful impact on market pricing,” Kasper Lund-Jensen, a London-based economist at Goldman Sachs, said in a Dec. 18 report. “We continue to forecast rates on hold for the next eight months” before rising 50 basis points next year and a full percentage point in 2015, Lund-Jensen said.
One-year Israeli interest-rate swaps, an indicator for borrowing costs over the period, rose to 0.93 percent, the most in more than a month, after the Federal Open Market Committee said its monthly purchases of Treasuries and mortgage-backed bonds would drop to $75 billion in January from $85 billion. The swaps were at that same level at 5:32 p.m. in Tel Aviv, and the shekel was up 0.3 percent at 3.4913 to the dollar.
“The Fed step is expected to reduce the need for an additional rate reduction and for an increase in foreign currency purchases,” Ofer Klein, head of economics and research at Harel Insurance & Financial Services, said before the rate decision. “The dollar should appreciate against most of the currencies in the world, so the Bank of Israel won’t have to lower its benchmark.”
Nineteen of 22 economists surveyed by Bloomberg had forecast the Bank of Israel would keep the base rate unchanged today for a third time, after paring it by 75 basis points earlier this year in a bid to curb the shekel’s gain, the most among 31 major currencies. It also bought $4.7 billion in foreign currency from April through the end of November.
The shekel’s strength has hurt the exports that account for about one-third of economic output, and Israeli manufacturers have urged the government to bring the exchange rate to 3.8 shekels to the dollar to promote growth. The central bank forecast today that the Israeli economy would slow to 3.3 percent in 2014 from 3.5 percent this year.
Some economists say the Bank of Israel isn’t finished cutting rates. Three of the 22 surveyed by Bloomberg had forecast a rate reduction in today’s decision.
“I would highlight that the Fed has introduced some forward guidance,” Benoit Anne, head of emerging-market strategy at Societe Generale SA, said by e-mail Dec. 19. “I still see one more rate cut coming over the next few months, as the Bank of Israel tries to weaken the currency.”
Anne said the market hasn’t fully “priced in” a rate cut.
“From a strategy risk-reward perspective, it makes sense to be positioned for a rate cut in the period ahead,” he said.