Rate Cut Call by Ex-Finance Chief as Bank Meets: Israel Markets

The Israeli central bank should think about cutting borrowing costs to weaken the shekel and stimulate exports, a former finance minister said.

“I would consider having the Bank of Israel reduce the interest rate,” Yuval Steinitz, currently minister of intelligence and strategic affairs, and finance minister from 2009 to 2013, said in an interview in his Jerusalem office yesterday. “That would help weaken the shekel,” which would mean “less foreign currency flows into the country.”

Some traders are betting rates may move lower. One-year interest rate swaps, an indicator for interest rates over the period, fell 9 basis points in the past two weeks to 0.875 percent, the lowest level since Dec. 18, and below the central bank’s benchmark 1 percent lending rate.

Governor Karnit Flug presides over the central bank’s first meeting of 2014 today, after policy makers cut the benchmark interest rate three times last year in an effort to curb gains by the shekel. The currency climbed 7.5 percent against the dollar in the period, the most of 31 major currencies tracked by Bloomberg, weighing on exports, which account for about a third of Israel’s $273 billion economy.

“This is the time to do it,” Yossi Fraiman, chief executive officer at Prico Group and Forex Capital Markets LLC, said in a telephone interview. “The economy is treading water, exports are suffering badly from the exchange rate, and this is an opportunity for the Bank of Israel to do something.”

Analysts See Hold

The Bank of Israel also purchased about $5.3 billion in foreign currency in an effort to contain shekel gains, bringing reserves to a record $81.8 billion at the end of December.

The benchmark TA-25 index rose 12 percent in 2013, about half as much as the MSCI World Index. The yield on the government’s benchmark bond due March 2023 fell 35 basis points, or 0.35 percentage point, last year.

The strong shekel is bringing exporters “to the breaking point,” the Manufacturers Association of Israel said in a statement last week.

“The Bank of Israel governor is inattentive to our needs and says the dollar exchange rate won’t affect all exporters,” association director Amir Hayek said in the statement. “The governor is wrong.” The manufacturers want the shekel to trade at a rate of 3.8 to the dollar “so that we can grow, not just survive,” Hayek said. The currency weakened 0.1 percent to 3.4998 a dollar by 10:05 a.m. in Tel Aviv.

The interest rate swaps suggest greater optimism about a rate reduction than analysts forecast. Three of 23 economists surveyed by Bloomberg forecast that policy makers will trim the benchmark to 0.75 percent, the lowest since November 2009, while the remainder predict no change.

Hold Forecast

“While the most likely scenario is that the Bank of Israel will leave the interest rate unchanged, a rate cut this week can’t be ruled out,” said David Reznik, head of macroeconomic research at the Leumi Capital Markets division of Tel Aviv based Bank Leumi Le-Israel Ltd.

Renewed speculation about a rate cut today provided a “tailwind” for the government bond market last week, Reznik said, with bond prices rising by an average of 30 basis points.

Israel’s economy grew by 3.3 percent in 2013, as exports and investment stagnated. Growth per capita was 1.4 percent. Exports of goods and services declined 0.1 percent, after rising 0.9 percent in the previous year.

Steinitz, who served as finance minister until March, has been trading barbs with his successor, Yair Lapid, over fiscal policy. In his interview today, he criticized the current government’s decision to raise corporate taxes and proposed they be brought down again.

“You say, okay, it’s less profitable because of the currency, so charge less tax and make it more profitable,” said Steinitz, who was a philosophy professor before entering politics. “I would immediately take this step, because we must increase exports this year, otherwise we have a major problem.”

Lapid declined to comment, spokeswoman Nilly Richman said by e-mail.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE