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Better-Than-Estimated Israeli Growth Reduces Rate Cut Chances

Israel’s economy expanded an annualized 2.7 percent in the first quarter, more than previously reported, reducing chances of a rate cut at the end of the month.

First-quarter growth was buoyed by exports of goods and services, which rose 8.8 percent, the Central Bureau of Statistics reported today. Growth for the first three months of the year was revised up from 2.1 percent, and growth in the three months through December was also revised up, to 3.2 percent from 2.9 percent.

The “much better print once again confirms our view that there is really no need to ease rates further,” said Tevfik Aksoy, chief economist for Europe, the Middle East and Africa at Morgan Stanley in London.

The Bank of Israel has reduced the benchmark interest rate 10 times since 2011 to 0.75 percent and purchased about $9.3 billion since April 2013 to help weaken the shekel and boost the export-dependent economy. Economic growth is expected to slow to 3.1 percent this year from 3.3 percent last year, according to a central bank forecast in March.

One-year interest rate swaps, an indicator of expectations over the period, rebounded 4 basis points after the growth data, and were trading at 0.61 percent. They had fallen as much as 4.5 basis points today after publication yesterday of the consumer price index, which showed inflation unchanged at the lower limit of the government’s 1 percent to 3 percent target. The median estimate of nine economists polled by Bloomberg had been 1.1 percent.

‘Low on Ammo’

“It will be much harder now to cut rates,” said Yshai Shilo, a bond trader at Israel Brokerage & Investments Ltd. in Tel Aviv, by phone. “I still think it’s the right thing to do, but the Bank of Israel is low on ammo and it needs to keep its bullets.”

The May Purchasing Managers Index, released earlier today, rose to 55.6 from 51.4 the previous month, showing a “serious pick up” Aksoy said. A PMI reading over 50 indicates economic expansion.

“It is true that macro indicators have been giving mixed signals, but this one is yet another data point that would cause a serious hesitation for the Bank of Israel to consider a cut, as half the market expects,” Aksoy said.

The next scheduled decision is June 23. Half of the 12 economists surveyed at the end of May forecast that the Bank of Israel would hold the rate, while the other half predicted a quarter-point rate cut.

Analysts who predict a reduction have cited the need to boost consumer spending, which fell 0.6 percent in the first quarter. They also note the strength of the shekel, which has appreciated 0.6 percent against the dollar since the previous rate decision, and was trading at 3.4569 at 5:18 p.m. in Tel Aviv.

The strengthening of shekel in the past month will serve as “primary consideration” in next week’s rate decision meeting, currency trader FXCM Israel said in an e-mailed report today.

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