Analysts don’t expect the Bank of Israel to announce a policy of quantitative easing on Monday, when the central bank is scheduled to make its monthly base interest rate announcement.
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Last Thursday, global banking firm HSBC predicted that the central bank would announce a quantitative easing package of up to 72 billion shekels ($17.8 billion), along with a negative base interest rate. In response to the prediction, the benchmark Tel Aviv-25 index jumped by 1.4% on Thursday, which was followed by a 1.34% rise in the index on Sunday.
The dollar rose against the shekel by 1.1% on Friday, to 4.053 shekels, while the euro’s value was boosted by 1.4%, to 4.329 shekels.
Quantitative easing is a policy in which a country’s central bank buys government securities or other securities, in an effort to increase the money supply. It is of particular relevance as a policy option when interest rates are close to zero, as they are now.
However, Jonathan Katz of Leader Capital Markets acknowledged that there was a reasonable chance that the central bank would lower the base interest rate into the negative range for April – to minus 0.1% – to combat deflation and the rise of the shekel against the trade-weighted basket of currencies.
“Despite the fact that the Bank of Israel is not enthusiastic about buying government bonds, it is absolutely a real possibility,” said Katz, along with possible further purchases of foreign currency by the central bank.
Lior Kedar, of Barak Capital, concurred that the central bank will not take drastic steps, but added that the local bond market is expected to continue to react to the HSBC forecast of a negative base interest rate and quantitative easing.
Quantitative easing, said Kedar, would not be announced now because the Bank of Israel would prefer to see how the market reacts to the most recent drop in the interest rate. If quantitative easing is instituted, he said, it would come in another month at the earliest.
“When it comes down to it, the economy looks all right and inflation is low. Mainly for reasons that support growth, the decisions of the [Bank of Israel’s] monetary committee will be taken based on developments in the foreign currency market,” said Uri Greenfeld, of Psagot Investment House.
“Nevertheless, since the last interest rate reduction, the shekel has dropped 2.2% in relation to the basket of currencies, so it’s not certain that the current timing is the most appropriate for a decision on any move. We therefore expect interest to remain in place [on Monday] afternoon, although it is certainly possible that the bank will try to signal the prospect of additional steps in the announcement accompanying the decision,” added Greenfeld.