(Bloomberg) -- The Bank of Israel is set for a close interest-rate call on Monday, with analysts almost evenly split between those predicting a cut to boost the war-damaged economy and those seeing monetary authorities keeping policy steady to protect the shekel.
A narrow majority of economists surveyed by Bloomberg — nine out of 17 — say the central bank will hold its base rate at 4.5% for a second consecutive Monetary Policy Committee meeting. Citigroup Inc. and JPMorgan Chase & Co. are among them.
The other eight, including Goldman Sachs Group Inc., see the MPC cutting the rate by 25 basis points to 4.25%.
The consensus shifted toward a hold last week after Iran vowed revenge against Israel for a strike on Tehran’s consulate in Damascus. The attack killed at least 13 people, including two Iranian generals. Israel put its forces on high alert. Israeli stocks dropped, while the shekel suffered its second-worst week this year.
The currency rebounded by 1.1% to 3.72 per dollar as of 9:40 a.m. in Tel Aviv on Monday, in part because Iran didn’t retaliate over the weekend.
The rising tensions contributed to Israel’s inflation outlook worsening in recent days, as measured by break-even rates. Two year break-evens have climbed to 3.17%, above the central bank’s target range of 1% to 3%.
“The increase in the risk premium of all Israeli assets combined with heightened inflation expectations, will likely place the Bank of Israel in a cautious position that will lead to a postponement in rate cuts,” said Rafael Gozlan, chief economist at Tel Aviv-based IBI Investment House.
The central bank lowered rates for the first time since the height of the covid pandemic in January, and in late February left them unchanged because of concern that inflation might accelerate as the war against Hamas in Gaza continues and the government ramps up spending on defense.
For now, inflation remains low. The year-on-year rate dropped to 2.5% last month from 4.1% in August.
“Markets have reduced the probability of a cut to 30%, but we think that chances are higher because inflation has entrenched within its target range,” said Gil Bufman, chief economist at Bank Leumi, Israel’s biggest lender by market valuation. “This could allow the bank to maintain a real interest rate of more than 1% even with a slight cut,” he said, referring to inflation-adjusted rates.
One concern for markets is the fiscal impact of the war. This year’s budget envisages a deficit of 6.6% of gross domestic product, a shortfall that would be among the biggest for Israel this century. It may turn out to be even wider if the conflict in Gaza is prolonged or if tensions with Iran and Lebanon-based Hezbollah — the Islamic Republic’s main proxy militia — worsen.
Amir Yaron, the Bank of Israel’s governor, has repeatedly said he’s concerned about fiscal policy and that it will be an important factor in determining monetary policy.
Israel’s current inflation rate “can be misleading” and “doesn’t necessarily indicate what’s in store for the future,” said Victor Bahar, chief economist at Bank Hapoalim, the second-biggest Israeli lender.
The central bank is due to release new macroeconomic forecasts after the rate decision. Jonathan Katz, a strategist at Leader Capital Market, says the bank will probably “stress its concern over a more expansionary fiscal policy.”
Katz expects the central bank’s inflation forecast for this year to rise toward 3%, up from 2.4% in January. He also sees the interest-rate outlook climbing to 4%-4.25% from 3.75%-4%.
The central bank will need to weigh rising inflation expectations against an uneven economic recovery from the first few weeks of the war. Many industries, including construction and tourism, are still suffering, even as credit-card spending rebounds.
“The economy is far from returning to its full growth potential,” said Alex Zabezhinsky, chief economist at Meitav DS Investments. “Keeping interest rates at a high level may reduce market volatility in the short term, but increase the risk to the economy and market stability moving forward.”
©2024 Bloomberg L.P.
Israel Faces Tough Call on Rates as War Clouds Economic Outlook - BNN Bloomberg
Read More
No comments:
Post a Comment