Bloomberg News

Shekel Weakens After Bank of Israel Hints at More Rates Cuts

October 25, 2011

Oct. 25 (Bloomberg) -- The shekel weakened for a second day after the Bank of Israel indicated it may lower interest rates in the coming months if the global economy doesn’t improve.

The shekel lost 0.2 percent to 3.6505 a dollar at 4:30 p.m. in Tel Aviv, trimming this month’s gain to 2.7 percent. The central bank last night left its benchmark lending rate at 3 percent following a 25 basis point, or quarter-percentage point, cut the previous month, saying it has “room to respond” to events in the global and local economies.

“The central bank gave the market a hint that it is leaving room for more interest rate cuts in the coming months,” Moshe Nir, a trader at Mercantile Discount Bank Ltd. in Tel Aviv, said by phone. “As a result, the rate differential with the U.S. may narrow in coming months, which isn’t supportive of the shekel.” Federal Reserve Chairman Ben S. Bernanke pledged in August to hold borrowing costs near zero until mid-2013.

German Chancellor Angela Merkel and fellow leaders will return to Brussels tomorrow for another summit on Europe’s bailout fund. A meeting of European Union finance ministers scheduled for tomorrow in Brussels has been canceled, the Polish presidency of the EU said. Policy makers are jousting with banks over the size of losses they take on Greek bonds while deliberating over leveraging the fund after ruling out tapping the European Central Bank’s balance sheet.

Lower Revenue

“The shekel has appreciated in October, owing largely to the euro’s recovery, but our expectation is that this won’t last,” David Lubin, chief emerging-markets economist at Citigroup Inc., wrote in a report today. He expects the currency to weaken to about 3.8 a dollar by year end.

There is a 34 percent chance the shekel will reach that level by Dec. 31, according to implied probability calculated from currency options. Fourth-quarter forecasts for the shekel range from 3.45 to 3.90 a dollar, with a median estimate of 3.65, according to the estimates from eight banks on Bloomberg.

“The level of uncertainty regarding developments in the global economy remains especially high, and clearly impacts on uncertainty regarding developments in Israel’s economy,” the Bank of Israel said yesterday. Tax revenue is likely to be “slightly” lower than the budget forecast, and the budget deficit for this year will be close to the deficit ceiling of 3 percent of gross domestic product, the bank added.

Two-year interest rate swaps, an indicator of investor expectations for the benchmark in the next two years, rose from the lowest in a week, climbing five basis points to 2.83 percent. The yield on the benchmark 5.5 Mimshal Shiklit bond due January 2022 fell three basis points, or 0.03 percentage point, to 4.66 percent at the 4:30 p.m. close, matching the level on Oct. 11.

Further Cuts

“Unless there is a significant improvement in the crisis situation in Europe borrowing costs can be expected to be cut once or twice over the coming half year,” Ori Greenfeld, head of the macroeconomic research department at Psagot Investment House Ltd. in Tel Aviv, wrote in an e-mailed report today.

The yield on the CPI-linked bond due June 2013 dropped seven basis points to 0.96 percent. The two-year breakeven rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, rose three basis points to 186. That implies an average annual inflation rate of about 1.86 percent over the period.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, advanced 0.2 percent.

--Editors: Claudia Maedler, Susan Lerner

To contact the reporter on this story: {Sharon Wrobel} in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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