Economist Who Predicted Last Israel Cut Now Sees Further Easing

  • Shlomo Maoz also expects additional foreign exchange purchases
  • Mortgage lending will also be curtailed to cap housing prices

Economist Shlomo Maoz, who predicted the Bank of Israel’s last surprise rate cut, now says the central bank will have to cut borrowing costs below zero to spur growth.

With exports sluggish, consumer prices falling and the shekel one of the strongest currencies in the world, Israel’s central bank will also have to expand its foreign currency purchases, said Maoz, chief economist at S.M. Tel Aviv Investments Ltd. To prevent the housing market from heating up further, after prices doubled in less than a decade, the bank will curtail mortgage lending, he said.

“If the Bank of Israel doesn’t act, the global situation will force it to act,” said Maoz, 69, who correctly predicted a rate cut in February, incorrectly forecast one in August and now expects another in the first half of the year. “The Bank of Israel says negative inflation is due to lots of one-time effects. I happen to disagree and think consumption is also soft. But let’s assume they’re right. So what? Negative inflation for a long time is still a big problem.”

Israel’s challenge echoes difficulties facing central banks in developed nations where inflation rates have run below policy makers’ targets, in part because of the slump in oil prices. European Central Bank President Mario Draghi has signaled more stimulus may come in March. Bank of Japan Governor Haruhiko Kuroda surprised investors Friday by sending rates below zero.

The Bank of Israel last reduced borrowing costs in February, to 0.1 percent. Pressure to take unconventional action such as negative rates has grown as inflation expectations have declined. After 16 months of negative inflation, expectations one year out fell below zero in January for the first time since March 2009, during the peak of the global financial crisis.

Ori Greenfeld, the chief economist at Psagot Investment House Ltd. in Tel Aviv, said he doesn’t expect any further easing because Israel’s economy is sound, with unemployment declining and consumption on the rise. If anything, he says the central bank will probably raise rates by the end of this year or early 2017.

“The Bank of Israel can’t do much about the deflationary environment as the pressures come from the supply side and not demand, with the government lowering prices and reforms boosting competition,” he said. “As the Federal Reserve raises interest rates and the differential with Israel’s rates widens, there is no reason for the shekel to strengthen.”

The shekel is the second-best performer against the dollar among major currencies worldwide in the past 12 months and is up 2.2 percent this year against the euro. Central Bank Governor Karnit Flug observed on Wednesday that the currency is “somewhat overvalued” against the euro. While the Israeli economy is doing “reasonably well,” the slowdown in global trade and the strong shekel have weighed on growth, Flug said.

To counter the currency’s strength, Maoz predicted the central bank will buy more than the $1.8 billion it has pledged to purchase this year to offset the effect of natural gas revenue.

“There’s a currency war going on right now,” Maoz said. “Do I really need to be one of the strongest currencies in the world?”

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