Investors Bet Bank of Israel Won’t Cut Rates in Coming Year

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Investors have this month been increasingly betting the Bank of Israel won’t cut rates. The central bank proved them right.

The yield on three-month central bank Makam bills, which some analysts say are bellwethers for the central bank’s interest rates, climbed to 0.14 percent on June 17, the highest since April 2. The average yield through April and May was 0.09 percent. The Bank of Israel’s five-member monetary panel, led by Governor Karnit Flug, kept the benchmark rate unchanged at a record low 0.1 percent on Monday. The shekel strengthened 1.4 percent to 3.7699 against the dollar at 4:52 p.m. in Tel Aviv.

The regulator cited rising inflation, which is beginning to converge to within the bank’s target range of 1 percent and 3 percent, for its decision in a statement. Twenty-two of 25 economists surveyed by Bloomberg had forecast the decision, while the remainder predicted a cut.

“The market is currently pricing in interest rates remaining unchanged for the whole of the coming year,” David Reznik, the head of fixed-income research at the capital markets division of Bank Leumi Le-Israel Ltd., said by phone from Tel Aviv. “The only reason for the central bank to lower rates is to support exports if the shekel strengthens much further.”

The Bank of Israel last reduced rates in February when it lowered borrowing costs to a record 0.1 percent to counter a strengthening shekel and help shore up exports, which account for about a third of Israel’s $280 billion economy. The central bank has cut interest rates 13 times since 2011.

Forward-rate agreements, used to speculate on rate moves for the next nine months, are trading above the central bank rate of 0.1 percent. They were at 0.13 percent today. The yield on three-month central bank Makam bills fell to 0.1 percent on June 18, the same level as the current base rate.

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