Goldman Sees Israel Rate Cut to Zero as Traders Raise Bets

Updated on
  • Central bank has cut the key lending rate 13 times since 2011
  • Swap, forward rates lowest since May before Thursday decision

The Bank of Israel will probably reduce the benchmark interest rate to a record low zero percent on Thursday, Goldman Sachs and Credit Suisse said, as traders increased bets on a cut after the U.S. Federal Reserve held rates last week.

Shekel one-year swap rates and three-month forward rate agreements dropped to their lowest in four months on Sept. 18, indicating traders expect a rate cut soon. Both were unchanged as of 5:41 p.m. in Tel Aviv. The yield on Israel’s 2025 benchmark bond fell one basis point to 2.23 percent after declining the most on Sunday since the note was issued in May.

The central bank will ease monetary policy to weaken the shekel and avoid a further decline in inflation expectations, Goldman economist Kasper Lund-Jensen said in a report last week. “Our baseline is a 10 basis point rate cut to zero, but it is not unthinkable that the BOI may push rates in to negative territory,” he said.

Investors increased bets Governor Karnit Flug may lower the rate after the Fed’s decision on Thursday to delay an increase, while Israel’s second-quarter growth was revised down the same day. The country’s finance ministry also lowered its forecast for expansion this year and next.

“The possibility for a rate cut has increased and the Fed decision supports this,” Yonie Fanning, chief economist at ILS Brokers Ltd. in Tel Aviv, said by phone. “It’s the right thing to do given that inflation remains below the government’s target range, and the upcoming decision could prove pivotal in achieving this.”

Below Target

Consumer prices are expected to rise 0.4 percent over the next 12 months, according to the average forecast of economists surveyed by the Bank of Israel, down from an estimate of 0.8 percent in August and well below the government’s target of 1 to 3 percent. Prices declined for a 12th month on an annual basis in August, falling 0.4 percent, as commodities fell and the government took steps to bring down prices.

The central bank has cut the nation’s key lending rate 13 times since 2011 as it battled a strong shekel that’s weighing on exports, slowing economic growth and declining inflation. It has also purchased foreign currency, buying about $6 billion from January through August, according to Bank Leumi Le-Israel.

"Israeli investors see interest rates staying low much longer than expected,” Oren Ossad, head of the fixed-income desk at Excellence Nessuah Brokerage, said by phone. “This is the reality when you take the Fed announcement along with little scope for rising inflation and the latest growth figures at home."

Fifteen of 17 economists surveyed by Bloomberg predicted the bank will leave the rate unchanged at 0.1 percent, with only Goldman and Credit Suisse expecting a cut. Many gave their forecasts before the Fed decision.

While the decision will probably be a “close call,” factors including rapidly rising house prices will probably keep the central bank from acting, said Alex Zabezhinsky, chief economist at Meitav Dash Investment House Ltd.

The bank’s monetary committee may also be held back by a government decision this month to cut value-added and corporate tax, he said.

“It looks like there’s some slowing of activity, but it’s not clear,” Zabezhinsky said. “Tax collection is continuing to rise and the labor market continues to be strong.”