Goldman Says Export Rise Slims Rate Cut Odds: Israel MarketsCalev Ben-David
A rebound in Israeli exports is signaling to Goldman Sachs Group Inc. that central bank Governor Karnit Flug will resist manufacturers’ calls to cut interest rates to weaken the shekel.
“We expect growth in total exports to pick up to around 4 percent in 2014,” Kasper Lund-Jensen and Ahmet Akarli, London-based economists at Goldman Sachs, said in a report last week. Imports will grow by a similar amount, making net impact on the shekel “fairly neutral” and reducing “the risks of a near-term rate cut,” they said.
Manufacturers say the strength of the shekel, which outperformed 30 other major currencies Bloomberg tracked last year, was a major reason exports slipped 0.1 percent in 2013. They kept their demand for a rate cut even after exports began rebounding late last year and the shekel’s appreciation stalled.
Sales abroad rose to $4.2 billion in January from $4 billion in December, according to government data. The currency, which gained 7.5 percent last year against the dollar, has declined about 1 percent this year.
The Bank of Israel, which has held the rate at 1 percent since October, is scheduled to announce its next decision on Feb. 24. Sixteen of 19 economists surveyed by Bloomberg forecast the bank will hold the rate again, with the rest predicting a quarter-point cut. The shekel strengthened 0.1 percent to 3.5090 per dollar at 5:20 p.m. in Tel Aviv.
The bank’s monetary policy committee cited an economic pickup and rising home prices when it kept the rate unchanged last month. The Manufacturers Association of Israel called the Jan. 27 decision “disappointing” and said borrowing costs should be cut to 0.25 percent to weaken the shekel and make goods sold abroad more competitive. The Israel Export & International Cooperation Institute said on Dec. 10 that the currency’s appreciation dealt exports a “mortal blow.”
Israeli Prime Minister Benjamin Netanyahu said in Davos last month that Israeli exporters must adjust to the stronger shekel because policy makers have limited options to curb it.
The government today announced measures to aid exporters, including raising the ceiling on export guarantees, expediting approvals of export risk insurance and allocating 50 million shekels ($14.2 million) to market goods abroad.
While exports have rallied in recent months, imports have climbed more, widening the trade gap to $1.5 billion in January from $1.2 billion a month earlier.
The rise in exports, if maintained, will benefit equity and bond markets, said Jonathan Katz, a Jerusalem-based economist at HSBC Holdings Plc. “The export figures were pretty broad-based and varied, not limited to one sector like pharmaceuticals or technology,” Katz said. “So although so far it’s just one robust number, if exports and domestic demand continue trending upwards, it will be good for companies and the whole economy and eventually the markets.”
The central bank has tried to weaken the shekel by stepping up its purchase of foreign currency reserves. It bought $1.7 billion in January, after buying $630 million the previous month, bringing its reserves to a record $83.2 billion.
The stabilization of the dollar-shekel rate in recent weeks makes it probable the bank will pare its currency purchases this month and hold the key rate, said Tal Zohar Avda, chief executive officer of the Tel Aviv branch of FXCM Inc. U.S. Federal Reserve head Janet Yellen’s Feb. 11 comment that she intends to maintain the policy of gradually reducing bond purchases, also support this view, Avda said.
“If the dollar continues to strengthen globally, mainly against the euro, it will get stronger in Israel, too,” Avda said. “As long as the dollar continues to stabilize or strengthen, there will be less pressure from the exporters on the Bank of Israel to cut the rate.”
Goldman forecasts the bank will hold the rate through the first half of 2014, until a continued improvement in exports, a gradual quickening of inflation and rising housing prices trigger “a hiking cycle” in the third quarter.
The International Monetary Fund, in its annual report on Israel’s economy released Feb. 12, urged the government to rein in housing costs by limiting loan-to-value ratios on mortgages and raising the property purchase tax for secondary homes.
“If global growth prospects improve sharply” or appreciation pressures on the shekel ease, “the monetary policy stance should be gradually normalized,” the IMF said.