The Bank of Israel will probably implement one more rate cut in the coming months, bringing the benchmark to zero, as it struggles to weaken the shekel, Goldman Sachs Group Inc. said.
“Given the soft inflation outlook and the stagnation in Israel’s exports, it is clearly conceivable that we will see more policy action from the central bank in the coming months,” analyst Kasper Lund-Jensen said in an e-mailed report.
The central bank has reduced its benchmark rate 13 times since 2011 to weaken the shekel and shore up exports, which account for about a third of Israel’s economy. Last year, the economy expanded 2.8 percent, its slowest annual pace in five years, and it’s forecast by the bank to grow 3.2 percent in 2015.
Goldman’s “base case scenario” doesn’t include a reduction to negative rates, since appreciation pressures in 2015 probably won’t be strong enough to make that necessary, the report said. One reason is the recent sharp outflow from domestic money market funds and the investment of some of this money abroad as rates, including fees, approach “negative territory,” creating depreciation pressures.
The shekel, which traded at 3.8832 shekels to the dollar at 10:55 a.m., will weaken to 4.10 shekels in three months, according to Goldman’s forecast.
Still, Lund-Jensen notes that the finance ministry instructed financial institutions to prepare for the introduction of negative rates, while Bank of Israel officials asked local banks if their systems are prepared to work with negative rates.
“This may open the door for the Bank of Israel to push rates into negative territory,” the report said.