Leumi Capital Markets: Bank of Israel will keep interest rate low

Leumi Capital Markets’ David Reznik sees no immediate change in the Bank of Israel’s monetary policy even if the US Federal Reserve raises its rate.

“The Bank of Israel can be expected to leave its interest rate unchanged for a fairly long time, because of the continuing trend of a strengthening shekel and a low inflation environment, low even by comparison with other OECD countries,” wrote Reznik, the bond research department head at Leumi Capital Markets.

According to Reznik, even if there is an interest rate hike in the US in the next rate decision by the Federal Reserve or the one after, the Bank of Israel’s interest rate will remain stable for the foreseeable future.

“A change in monetary policy in Israel is still far off, and for the time being the Bank of Israel can be expected to maintain its policy substantially unchanged, that is to say, it will keep its ultra-low interest rate, alongside interventions here and there in the foreign exchange market. Additional monetary policy tools are not expected to be used,” he wrote.

This estimate comes despite the fact that some on the capital market asses that in its last interest rate announcement the Bank of Israel already hinted at a change in interest rate policy from dovish to neutral and in the future perhaps even to hawkish.

“Federal Reserve officials continue to make hawkish statements on the possibility of an interest rate rise as soon as the September decision, recently joined by Janet Yellen and Stanley Fischer, who have spoken about the need for an interest rate rise in the light of the situation in the US economy and the improvement expected in the second half year,” Reznik wrote.

“The US market has not come into line with the remarks of the heads of the Federal Reserve, and has been supported by weak recent macro numbers in its expectation that there will be no interest rate hike until December. It appears that, on Friday, the market realized that there was a real possibility of an interest rate hike in September, and so there were fairly sharp fall on the stock market and rises in bond yields, and the government yield curve became steeper. The European Central Bank did not take further expansionary steps and left its policy unchanged, which is likely to assist the Federal Reserve in raising its interest rate in the short term,” Reznik concluded.