Central Bank Rate Cuts Push Shekel Down

The benchmark Government bonds of Israel have seen a rise and hence, the yield has gone down to a record low value. In addition to that, the major currency of Israel, Shekel also weakened by 0.1% and the same is now priced at 3.7471 per USD. Hence, the monthly gain of this currency has been trimmed to 1.8%. Shekel’s decline was mainly because of the Central Bank’s decision to cut the base lending rate so that the slowing down of economic growth can be handled. This decision of Central Bank was a shocker for many investors, as commented by the analysts.

The yield on the 5.5% Government notes which are due on January, 2022 got down by 4 basis points and is at 3.65% currently. The notes started trading in April, 2011 and since then; this is the lowest value for the yield.

Stanley Fischer, the Governor of Israel’s Central Bank announced the decision to cut down the lending rate to 1.75%, which is the lowest in last 2 years. Stanley stated that they expect that this decision will encourage demand. The economic outlook for next year was also reduced by the Central Bank. It was 3% previously, but, now has been cut down to 2.8%. The economic outlook, however, does not include the profits generated through gases.

According to the Chief Economist of ILS Brokers, Modi Shafrir, the Bank of Israel will continue the expansionary monetary policy that it is currently running, mainly because weakness is visible in local economy. He stated that the policy makers are most likely to keep the rate at same value till the next few months, but, sometime in 2013, another rate cut should be expected.

1-year interest rate swaps have gone down by 10 basis points in December and are currently at 1.72%. These swaps indicate investor expectations for the rates for the mentioned time period (In this case, 1 year). The Central Bank officials will sit again on 28th January and it is expected that the borrowing costs will be kept at the same level after that meeting.

On the other hand, The Tel-Bond 40 Index of the corporate bonds surged ahead for the 3rd straight day and the same has increased to 280.42 now. The 2-year break even rate however declined for the 1st time since 18th December and is at 221 currently.