Rate discord pits Goldman, JPMorgan against Israeli central bank

A man stands in front of an electronic board displaying market data at the Tel Aviv Stock Exchange in Israel. (Reuters pic)

TEL AVIV: The Bank of Israel’s own forecasters have trouble knowing what policymakers may do next.

Soon after its researchers surprised this month by maintaining their forecast for an increase in interest rates by the end of September, Governor Amir Yaron said a hike could come “at a later date,” depending on a range of factors.

Last October, the department pushed off its call for rates to rise before year’s end – then, just a month later, the central bank shocked with its first hike since 2011.

The cross talk has only made the Bank of Israel’s predicament worse. Its hawkish outlook has contributed to the shekel’s strength, which in turn helped choke off inflation and weakened the central bank’s hand.

As the wait drags on, official borrowing costs remain near zero, leaving policymakers with less ammunition should the economy need stimulus again.

“This is something that is not good for the Bank of Israel’s credibility,” said Gil Bufman, chief economist of Bank Leumi Le-Israel. “It’s really not forward guidance. They make a lot of mistakes and the market just doesn’t understand it.”

The discord is also playing out among economists and investors whose own expectations have grown increasingly untethered from the central bank.

Despite the hawkish bias, interest rate swap markets are pricing in an increase of only five basis points from the current 0.25% over the coming year. Both Goldman Sachs Group Inc. and JPMorgan Chase & Co recently pushed back their calls for the next hike to the third quarter of 2020.

“We believe that the market, the analysts, understand that what is important here is the model, is the general process,” Bank of Israel research department head Michel Strawczynski said in an interview. “There is always a probability that there will be some mistake.”

A tight labour market and higher-than-forecast inflation readings were among factors that dictated the forecast for a rate hike in the third quarter of this year, according to Strawczynski.

Following an unexpectedly steep slowdown in June price data a week after the forecast, he said “we don’t see evidence that it reflects long-term forces.”

Every three months, the research department models the whole macroeconomy and issues specific staff projections for growth, inflation and the central bank’s interest rates. They’re relevant for the time they’re produced.

In contrast, the monetary committee currently provides vaguer forward guidance that rates will rise in a “gradual and cautious” manner.

After the central bank held borrowing costs unchanged this month, the governor emphasized the staff forecasts don’t come from policymakers.

Major central banks such as the US Federal Reserve use tools like the “dot plot” to signal its outlook for the path of interest rates with greater precision.

The forecasts in Israel are generated through a model by inputting data and selecting forecasts for future variables like the price of oil or US policy rates, then judging the results to see if they’re realistic, according to Nathan Sussman, a former Bank of Israel policymaker who led the research department from 2011 to 2017.

What’s raised some talk lately are “some professional forecasters that found these numbers maybe not plausible,” Sussman said.