How will the interest rate hike affect the Bank of Israel?

The decision of the US Federal Reserve’s Open Market Committee to raise the US central bank’s interest rate by 0.75% brings the rate to a peak not seen in the US economy since 2008. In addition, the Federal Reserve announced a revision of it. The forecast for the interest rate, under which the rate will be 4.6% at the end of next year, is much higher than the previous forecast rate of 3.8%. After the announcement, Wall Street stock indices became volatile, dropping as much as 1.8%.

“The Fed raised the interest rate in line with most expectations, and significantly raised its forecast for the coming years. It now estimates that the rate will rise to 4.4% at the end of 2022 (previous forecast, in July, was 3.4%); to 4.6% at the end of 2023 (previous forecast was 3.8%); and 3.9% at the end of 2024 (previous forecast was 3.4%).This indicates that, like President Jerome Powell, most members of the Federal Reserve believe that interest rates will remain at deflationary levels for a period long,” explains Moody Schafferer, chief strategist at Bank Hapoalim.

“On a more encouraging note to markets, the Fed has a forecast for the end of 2025 of 2.9%, and a long-term nominal neutral rate forecast of 2.5%,” Schafferer adds.

Schafferer believes that the Fed’s new forecast will prompt the Bank of Israel to raise its interest rate forecast as well, to 3.5% at the end of next year, from 2.75% in its current forecast.

Harel Gillon, co-CEO of Oppenheimer Israel, sees the Fed’s move as a much broader goal than lowering inflation. “This is a transcript of the previous announcement in July. The wording is very similar. Although the Fed did not surprise the market, this is a bigger event in my view. The central bank took inflation and decided to use it to wean the market off the quantitative easing that started in 2008 ,” he says. After the interest rate announcement, Wall Street stock indices fell 1% or so, but then rose slightly. Gillon explains this by the fact that the Federal Reserve has not been aggressive in terms of expectations, and that the market expects and hopes that inflation will fall.

“Now is the Federal Reserve’s great test, and in just a few months we will know if it will work. The huge amounts of money pouring into the economy during the Covid-19 pandemic, huge supply chain problems, and the war in Ukraine, have led to a change of mindset and the realization that policy must That change. The Fed wants to wean the market off the cheap money, and no one knows how this experiment will turn out.”







What about the repercussions for the Bank of Israel? Gillon offers a somewhat unusual position, and argues that he shouldn’t have a rate hike absolutely either in his next announcement on October 3. The government wants to stop inflation, and it can do so by lowering the excise tax on fuel. The CPI reading for September is also expected to be low, as in August, when it was negative. I’m not sure we should follow the US central bank. It is true that the dollar exchange rate of the shekel will rise slightly, but this is not necessarily a bad thing. The Bank of Israel has large foreign exchange reserves, and exporters will benefit from them as well.”

In contrast, Ronen Menachem, chief economist and head of research and investments at Mizrahi Tefahot Bank says, “Overall, the Fed’s announcement has indirect consequences for the Bank of Israel, which has adopted the front-loading policy that is prevalent in most of the world, so the Fed’s move increases Chances of a rate hike here as well, maybe 0.5%.”

Posted by Globes, Israel business news – en.globes.co.il – on September 22, 2022.

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