High likelihood for an additional interest rate cut by year end or in the beginning of 2014
The Bank of Israel (BoI) cut its interest rate for October by 25bps, bringing the central bank rate to 1.00%. Factors contributing to this decision include: an absence of inflationary pressures in the economy, moderate economic growth against the backdrop of a decline in exports and the moderate rate of private consumption growth, and the decline in growth forecasts of leading countries by international organizations and governments. Furthermore, there is the continued trend of appreciation in the exchange rate, which hurts export revenues. The cut in the central bank’s nominal interest rate was reflected also in a low, negative real rate (see graph). This is because the 12-month inflation expectations derived from the government bond market, which reflect the estimates of investment institutions, currently stand at 1.3%, above the BoI rate. The 12-month inflation expectations of Bank Leumi, and also of the BoI, currently stand at close to 2%, thus also reflecting a negative real interest rate.
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