Goldman Sachs surprised everyone with a prediction that the Bank of Israel would be cutting the benchmark interest rate for a 3rd straight month. This is due to slow economic growth and 0 inflation.
Governor Karnit Flug and her six member policy committee of the Bank of Israel, has so far brought 4 rate cuts which no one in the economic circles of analysts had predicted. Goldman Sachs is the only one to accurately predict a cut. The Bank of Israel will more than likely trim 10 basis points off the 0.25% rate which is against expectations. Bloomberg on the other hand questioned 21 other economists that forecast no change.
Goldman expects the central bank to upend the market again in order to get the inflation rate back to target over the coming 12 months. Slowing to 0 in August 2014, the annualized inflation is the lowest in the past 7 years and far below Israel’s target of 1-3%. Estimating an economic growth slowdown of 2% this year is what the Central Bureau of Statistics had planned.
Using rate cuts and foreign currency purchases to rev up the economy is what the central bank has been doing since seeing its annual growth slow down to its lowest rate since 2009. The Israeli economy saw a falloff in global need and demand for exports and a vibrant shekel but saw damage done by the 50 day Gaza conflict against Hammas. Lower than expected is the Central Bureau of Statistics growth estimate. It got pushed back from a forecast of 2.4% according to the Finance Ministry which was down from the actual grown of 2013’s 3.2%. Should predictions be accurate, the Israeli economy would grow at the slowest rate since 2009. Influenced negatively by the warfare, the Bank of Israel’s State of the Economy Index remained unchanged in the month of August making it 2 months straight of such activity.
The shekel theoretically could reverse course but the Bank of Israel has to cut the rate according to Goldman. The shekel lost 6.7% against the dollar since July 28 of this year, which launched the first of 2 back to back Bank of Israel interest rate cuts. Among 31 major currencies tracked by Bloomberg, the shekel is the 31st worst performer.
The damage control needed by the Bank of Israel and the committees may follow convention or bring up more surprises in months ahead. It all depends on decision making, statistical data and avoidance of civil unrest. Goldman Sachs will definitely be monitored for the latest info as this time they have proved themselves again this time.