Surprising interest rate hike? The weak shekel provided the Bank of Israel with comfortable ground

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Surprising interest rate hike?  The weak shekel provided the Bank of Israel with comfortable ground

| Nira Shamir, Chief Economist, Discount Bank

Bank of Israel and raised the transition to expectations, to 0.75%.

As a result, there has been a sharp rise in the Bank of Israel interest rate embedded in the market and a rise in yields in the government bond market throughout the shekel and indexed curve.

The Bank of Israel interest rate embedded in the IRS market

The Bank of Israel’s last two interest rate decisions are determined to raise interest rates quickly, at least in the beginning. This is similar to the route of raising the Federal Reserve in the US. Moreover, the current announcement highlights all the strengths of the local economy, while the risks are hidden.

The optimistic picture of the economy mentions the labor market close to full employment, the level of GDP that is around the pre-crisis trend line, the rapid growth of tax collection, the export of high-level services and the business that conveys optimism.

At the same time, the Bank of Israel recognizes a significant decline in local economic risk, resulting from coronary heart disease. On the other hand, there is a slowdown in global economic activity, and investment houses have updated their downward growth forecasts, but, in the opinion of the Bank of Israel, these may have some negative impact on economic activity.

However, the decline in exports of high-tech services is not mentioned at all, as are the difficulties in raising capital of this sector, which in recent years has served as a major growth engine.

There is no doubt that it, which has weakened since the beginning of the year, and especially since the last interest rate announcement, has provided the Bank of Israel with favorable ground for raising interest rates sharper than expected. The main task facing the Bank of Israel is to curb inflation, which, although low relative to other countries, is above the target range, while increasing both tradable and non-negotiable prices.

In our estimation at Discount Bank, and assuming that the Bank of Israel adheres to its firm position, the interest rate at the end of the year will be 1.75%, and 2.25% for another year. However, since the aforementioned risk factors are hardly mentioned, it should not be ruled out that the Bank of Israel will change its position and slow down the rate of interest rate increase.

The interest embodied in the IRS market (exchange Interest rates) For another year, it rose sharply, from 2% before the interest rate announcement to 2.7% as of Tuesday morning, May 24, while the interest rate embodied for six months rose from 1.4% to 2.0%.

The review was prepared by Discount Bank’s Macroeconomics Department, managed by Nira Shamir, Chief Economist at the Bank, and was written by Einat Meir, Discount’s Macro and Market Analyst. The analysis in this review is for informational purposes only and should not be construed as a recommendation, a substitute for personal advice that takes into account the data and special needs of each client or an invitation to such advice or an offer to hold / buy / sell securities or financial assets or a liability of Discount Bank Israel Ltd. : “The Bank”) to advise its customers in accordance with what is stated in it. The opinions presented in the review represent the position of its authors and are not necessarily identical to the position of the Bank’s investment advisers. The aforesaid opinions are correct as of the date of their first publication and may change at any time without the need for prior notice.

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