Traders doubled bets on Israeliinterest rate cuts in the past two weeks, speculating thecentral bank will act to insulate the economy from a globalslump as inflation slowed to a one-year low.
The Bank of Israel may lower the 2.75 percent key rate 41basis points over the next 12 months, compared with 21 basispoints of cuts priced in on Dec. 8, according to interest-rateswaps, an indicator of investor expectations. Policy makersreview borrowing costs today, with 12 out of 20 economistssurveyed by Bloomberg forecasting a 25 basis-point reduction.
��Traders expect the Bank of Israel to act fast and lowerrates in coming months before the crisis in Europe, which isexpected to further ease local exports and private consumption,deteriorates,�� Modi Shafrir, chief economist at Tel Aviv-basedI.L.S. Brokers Ltd., said by telephone. ��The central bank hasthe ammunition to boost growth as inflation has slowed.��
Israeli economic growth has been slowing this year as thedebt crisis in Europe, one of the nation��s biggest tradingpartners, crimps demand for exports such as electroniccomponents. Overseas shipments account for almost 40 percent ofIsrael��s gross domestic product and the threat of a worseningglobal slowdown spurred the central bank to cut rates twice inthe past three months, joining emerging-market policy makersfrom Brazil to Indonesia in easing access to funding.
The trade deficit widened in November to a seasonallyadjusted $1.64 billion from $1.45 billion the previous month,the statistics office said Dec. 12. It had widened to $1.78billion in May, the most in at least 16 years, as exports fell.
Room to Cut
A greater-than-expected slowdown in inflation is givingGovernor Stanley Fischer more room to lower borrowing costs.Consumer prices rose 2.6 percent in November from a yearearlier, Israel��s Central Bureau of Statistics said Dec. 15.Economists had predicted a rate of 2.8 percent, according to themedian 10 estimates in a Bloomberg survey.
Before the an! nounceme nt, 11 out of 15 economists surveyedsaid the central bank would leave the benchmark interest rateunchanged and four forecast a reduction.
��Core inflation was down, housing prices were down, it wasa trend-setting kind of thing,�� said Jonathan Katz, a Jerusalembased economist for HSBC Holdings Plc. ��I thought Fischer wouldbe on pause. But now I think he could cut.��
The two-year break-even rate, the yield difference betweeninflation-linked bonds and fixed-rate government bonds ofsimilar maturity, has fallen from a high of 357 on May 2 to alow of 157 on Sept. 15. The rate implied inflation of 1.92percent as of 12:35 p.m. in Tel Aviv.
Worsening Global Outlook
Economists�� 12-month inflation expectations declined to 2.2percent from 2.3 percent a month earlier, the central bankreported Dec. 19. The government��s target range for inflation is1 percent to 3 percent.
The central bank last cut its benchmark lending rate inNovember, lowering it by a quarter point. While Israel passedthrough the 2008-2009 crisis in ��reasonable shape,�� theeconomy is now being affected by the worsening global outlookand the Bank of Israel was justified in switching to a looseningmonetary stance, the OECD said Dec. 12.
The Bank of Israel will probably lower its growth forecastof 3.2 percent for 2012 as the European crisis weighs on theglobal economy, Fischer said Dec. 7. The bank��s new growthprediction will probably be ��around�� the Organization forEconomic Cooperation and Development��s 2.9 percent forecast, hesaid. The Central Bureau of Statistics said on Nov. 16 economicgrowth eased to an annualized 3.4 percent in the third quarterfrom a revised 3.5 percent in the previous three months.
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