Is Another Israeli Rate Hike Coming Up?

The central bank of Israel hiked rates in August to become the first country to begin to normalize monetary policy during the recovery. It held rates steady in September and October, but speculation is increasing that it will hike rates again when it meets on Nov. 23.

Israel reported that Q3 GDP rose a preliminary 2.2%, the most in over a year, flattered by exports and investment. This is more than twice the Q2 annualized pace of 1%, which was revised from 0.8%.

Over the weekend, Israel reported that consumer prices rose 0.2% in October for a 2.9% year-over-year increase. Prices are particularly sticky in Israel. Although an outright decline in CPI was experienced in H1 07, the rise in housing prices, administered prices and taxes has ended the deflation threat.

Inflation is now at the upper end of the central bank's 1%-3% target. The benchmark 10-year note extended its rally to new 9-month highs and yields slipped a basis point to 4.32%, 93 bp above similar US yields. The eight day rally may be partly predicated on speculation of a rate hike later this month.

At the end of last week, Israel reported a trade surplus for the month of October. Although the surplus was a modest $45.7 million, it was the first surplus in at least 14 years. The government's report underscored the importance of technology exports, which increased an average of almost 4.5% a month from August through October.

Meanwhile, the governor of the central bank, Stanley Fischer, seemed to suggest that official sales of the shekels on the foreign exchange market will continue. This intervention operation began in March 2008 and, since then, reserves have nearly doubled to over $60 billion (as of the end of October) and the M1 money supply has increased nearly 55% in the past year.

The dollar has spent the better part of the last three months between ILS3.70 and ILS3.80, with minor exceptions to the downside in mid-October and minor penetration of the upside at the start of the November. Near-term risk is on the dollar's downside with ILS3.7450 the initial target and then ILS3.70. Key support is probably closer to ILS3.67.

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Comments

[Michael H:]

Nice summary. Life is not simple, especially ine you are one of the first countries to emerge from the recession.
Matters are also complicated that the 3Q showed significant signs of increased consumer demand, yet unemployment remains high.
No time to consider the incresing budgetary deficit......

Nov 18 10:40 AM