Bethel Finances: HSBC: BoI may have changed mind on shekel

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Bethel Finance news:

With the economy "running on all pistons," there is less justification for intervention, according to analyst Jonathan Katz.

Bethel Finance news:

The strong performance of the Israeli economy in the first quarter may have led to a change of mind at the Bank of Israel about exchange rate policy. This is the assessment of HSBC analyst Jonathan Katz, in a macro review released this morning. "From the view of the Bank of Israel, there is less justification in supporting the shekel by intervention, in light of robust growth in general and in exports in particular. This could very well explain the lack of any determined response to shekel appreciation since the last 50 basis point rate hike," Katz writes.

Katz describes the Israeli economy as "running on all pistons" in the first quarter. The output gap is rapidly disappearing, which will be "rate hike supportive." He sees a 4% rate coming earlier than the Bank of Israel's own projection that its interest rate will reach that level one year from now. "We expect this to happen by end-2011, in light of the robustness of the economy," says Katz, who concludes that the current HSBC forecast of a NIS 3.4/$ exchange rate by the end of the year may be too conservative. HSBC is also considering raising its GDP growth forecast for 2011 from 4.0%, "most likely in the direction of 5%."

Israel's industrial exports expanded annually by 27.3% (SAAR), following 19.9% in the fourth quarter of 2010. Imports of raw materials surged 39.2% in the first quarter, imports of investment good jumped 36.5% and consumer imports increased 15.4%. "Strong export and import growth in March will contribute to strong growth of the Bank of Israel's composite index of the economy, a major indicator in policy rate decisions," Katz writes.

Katz does note some factors that could moderate the appreciation of the shekel. "A capital gains tax on foreigners investing in the Makam market (probably by mid-year) may slow appreciation. In addition, the current account surplus is declining sharply in 2011 on the back of surging imports (and import prices), from 3.1% GDP in 2010 to probably half that in 2011 or even less. Geo-political risks also remain, especially the expected UN General Assembly vote recognizing a Palestinian state in September, which could isolate Israel," he concludes.

In early foreign exchange trading this morning, the shekel-dollar rate is up slightly, by 0.06% on yesterday's representative rate, at NIS 3.4192/$. The shekel-euro rate is flat, at NIS 4.959/€.