Citi: Israel interest rate to stay unchanged for now

"We do not expect the Bank of Israel to cut either."

Citi says that it "seems difficult for us to imagine the Israeli monetary authorities raising rates anytime soon, especially as prospective Fed rate cuts are likely to significantly widen the short-term rate gap between the two countries." The bank made the assessment following the Bank of Israel's decision to leave the interest rate unchanged yesterday at 4.25%, after last month's 25-basis point hike, and in view of the deterioration in the US outlook.

Nevertheless, Citi added, "We do not expect the Bank of Israel to cut either, unless the shekel appreciates much further or the domestic economy starts slowing markedly (which it has not shown any signs of doing so far). A stable rate policy thus appears the most likely scenario for first half of the year, though in the long run, equilibrium Israeli rates probably are higher than current levels."

Citi noted, "We had argued that while the rise in domestic inflation pressures - which had pushed the year-on-year inflation rate above 3% in December - had justified a tightening bias by the Bank of Israel up to early in January, global developments (which have prompted a surge in the shekel to around NIS 3.65/$) would prompt the Central Bank to halt the tightening process. This is exactly what seems to have happened: the statement acknowledged that the economy is still 'subject to inflationary pressures', deriving from rapid growth and the closure of the output gap, but added that these effects were balanced by potential disinflation from the expected slowdown in US growth and world trade, and the weakening of the dollar versus the shekel. The statement also specifically referred to prospects for further policy easing in the US."

Published by Globes [online], Israel business news - www.globes-online.com - on January 29, 2008

© Copyright of Globes Publisher Itonut (1983) Ltd. 2008

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