Leader Capital Markets Bets Against Bank of Israel on Interest Rates
Translated & summarized from Bizportal by baba
Leader Capital Markets predicts Israel's interest rate will remain at 3.25% for another year, contrary to the Bank of Israel's forecast of 3.0%. The firm cited a hawkish tone from the central bank, accelerating inflation expectations, and a weakening shekel. They also noted that even with projected inflation, the real interest rate remains below the Bank of Israel's stated minimum requirement. Leader Capital Markets believes strong economic growth reduces the urgency for further rate cuts, but a strengthening shekel could open the door for a reduction.
The story in 5 lines · by baba
- Leader Capital Markets forecasts Israel's interest rate will stay at 3.25% for another year.
- This contradicts the Bank of Israel's projection of 3.0% by the third quarter of next year.
- The firm cited a hawkish tone from the central bank and accelerating inflation expectations.
- Leader Capital Markets noted the real interest rate remains below the Bank of Israel's minimum requirement.
- Strong economic growth reduces the urgency for further monetary easing, according to the firm.
Leader Capital Markets forecasts that Israel's benchmark interest rate will remain at 3.25% for at least another year, diverging from the Bank of Israel's own projection of 3.0% by the third quarter of next year. The firm's economists, including Yonatan Katz, noted a slightly hawkish tone in the central bank's recent decision to hold rates steady after a series of cuts, suggesting that further reductions are unlikely. While inflation is currently below the target range, Leader Capital Markets anticipates it will accelerate towards the target in the coming months. Factors contributing to this outlook include a halt in the moderation of tradable goods prices, a 3.1% weakening of the shekel since the last rate decision, and a slight increase in Israel's risk premium due to geopolitical tensions.
Leader Capital Markets also pointed to a potential contradiction in the Bank of Israel's forecasts: an increased inflation projection for next year to 2.1% (up from 1.8%) while maintaining the 3.0% interest rate forecast. This combination would result in a real interest rate of approximately 0.9%, significantly below the 1.5% minimum real rate the Bank of Israel has previously emphasized as necessary for the economy. Even Leader's own forecast of a 3.25% rate and 2.3% inflation yields a real rate below 1%, indicating a relatively accommodative monetary policy.
The firm's analysis suggests that Israel's strong economic growth, projected at 3.4% this year and 5.2% next, along with robust private consumption, does not necessitate further monetary easing. Leader Capital Markets is hesitant to predict another rate cut unless the shekel strengthens, potentially due to positive election outcomes for the markets. However, they caution that widening interest rate differentials with other countries, as global central banks may continue to raise rates, could limit any significant shekel appreciation.
Leader Capital Markets also highlighted that official GDP growth figures might be distorted by foreign production, particularly Nvidia's activities. A monthly index of economic activity, which adjusts for this distortion, showed a 4.3% annualized growth rate in the third quarter. The firm also noted a slight easing in the labor market, with an increase in the labor force participation rate and employment, while unemployment rose to 3.0%. This easing, along with the continued influx of foreign workers, is expected to moderate wage pressures and inflationary risks.
