Barclays to Morgan Stanley See Easing Cycle Over: Israel MarketsAlisa Odenheimer and Gwen Ackerman
Israel’s central bank has reached the end of its easing cycle after cutting the key lending rate 10 times since 2011, said analysts at banks including Barclays Plc and Morgan Stanley.
Policy makers led by Governor Karnit Flug kept the benchmark lending rate at 0.75 percent today, the lowest since November 2009. All 24 economists in a Bloomberg survey forecast the decision.
Signs the domestic and global economies are improving, along with concerns that further cuts may fuel home prices without doing much to weaken the shekel, suggest the bank’s next move will be to tighten policy, said Alex Zabezhinsky, chief economist at Tel Aviv-based Meitav DS Investment House Ltd., speaking before today’s decision.
“They’re all finished,” agreed Daniel Hewitt, a senior emerging-market economist at Barclays in London. “Further cuts probably won’t help the currency very much. And growth isn’t doing badly.”
Israel’s economic growth accelerated to 3.2 percent in the fourth quarter after slumping to 1.8 percent in the three months through September, the lowest in more than four years. The bank said today that there are indications of “some acceleration in the expansion” in the first quarter, led by domestic demand and services exports. Unemployment declined to 5.8 percent in February, from as high as 7.1 percent in 2012.
That’s fueling bets the central bank won’t take its key rate any lower. Israel’s one-year interest rate swaps, an indicator for interest rates over the period, have climbed 7.5 basis points since March 19, to 0.7 percent.
“The economy may be improving, but inflation will remain low in the medium term because of various reforms designed to reduce the cost of living,” said Ori Greenfield, chief economist at Psagot Investment House Ltd. in Tel Aviv. “So the Bank of Israel can feel comfortable with a low interest rate as long as interest rates in the world don’t rise.”
Assuming the rate won’t go up in the U.S. until the end of 2015, the domestic interest rate will remain on hold throughout the coming year, Greenfield said.
Also helping policy makers stand pat is the shekel. The currency is little changed this year after climbing 7.5 percent against the dollar in 2013, the most of 31 major currencies tracked by Bloomberg, stoked in part by discoveries of natural gas reserves off Israel’s Mediterranean coast. It weakened 0.2 percent to 3.4768 a dollar as of 4:41 p.m. in Tel Aviv.
Today’s bank announcement came at 4 p.m. local time, an hour and a half earlier than past rate decisions. The bank said this month it will change the time of the announcements to enable local markets to react.
“The easing cycle is over not just in Israel but around the world,” said Ofer Klein, head of economics and research at Harel Insurance & Financial Services in Ramat Gan near Tel Aviv.
It may be some time before Israel joins them, though. With 1.3 percent inflation near the floor of the government’s 1 percent to 3 percent target band, the end of the easing cycle doesn’t mean rates will be going up just yet.
“The interest rate is unlikely to be changed soon,” Tevfik Aksoy, Morgan Stanley’s London-based chief economist for Europe, the Middle East and Africa, said by e-mail. “The Bank of Israel will probably wait a bit longer to let the U.S. rates rise, and the yield difference to possibly lead to some shekel weakening.”
The Fed Funds Target Rate rate of 0.25 percent has been unchanged since December 2008.
Not everyone is happy with the idea that rates won’t be cut any further. Zvika Oren, president of the Manufacturers Association of Israel, said that an additional reduction would help make the economy more competitive.
“An additional rate cut would help reduce rate differentials with the euro bloc and the U.S., and moderate some of the forces acting to appreciate the shekel and erode export profits,” Oren said following the decision. “A rate cut would make credit cheaper for the business sector overall, and especially for small and medium-sized businesses.”