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Morgan Stanley Warns Israel About Interest Rates
Reported: 00:32 AM - Jun/20/07
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(IsraelNN.com) Morgan Stanley says that Israel’s current interest rates “underestimate inflation risks.”
In its review, entitled "The Peril of Underestimating Risks," Morgan Stanley writes that "the shekel’s appreciation is no longer enough to curb inflation pressures. Even though we still believe in the shekel’s fundamental strength, interest rates in Israel are no longer in synch with strengthening domestic demand at an above-potential rate and emerging inflationary pressures.
"It may be early to flag an episode of overheating, but the Israeli economy is certainly expanding at a rate that keeps narrowing the output gap, especially as we witness a slowdown in productivity growth…[Interest rates at current levels] underestimate inflation risks. Thanks to technical (but temporary) deflation, Israel has decoupled from the rest of the world. Although fundamental improvements should keep supporting the shekel’s valuation (below NIS 4.10/$), the deflationary power of currency appreciation is coming to an end and “domestic” factors will become far more influential over inflation dynamics. As a consequence, with the stabilization of the exchange rate and above-potential growth in domestic demand, we expect a steady increase in inflation."
Report passages reprinted by Globes
In its review, entitled "The Peril of Underestimating Risks," Morgan Stanley writes that "the shekel’s appreciation is no longer enough to curb inflation pressures. Even though we still believe in the shekel’s fundamental strength, interest rates in Israel are no longer in synch with strengthening domestic demand at an above-potential rate and emerging inflationary pressures.
"It may be early to flag an episode of overheating, but the Israeli economy is certainly expanding at a rate that keeps narrowing the output gap, especially as we witness a slowdown in productivity growth…[Interest rates at current levels] underestimate inflation risks. Thanks to technical (but temporary) deflation, Israel has decoupled from the rest of the world. Although fundamental improvements should keep supporting the shekel’s valuation (below NIS 4.10/$), the deflationary power of currency appreciation is coming to an end and “domestic” factors will become far more influential over inflation dynamics. As a consequence, with the stabilization of the exchange rate and above-potential growth in domestic demand, we expect a steady increase in inflation."
Report passages reprinted by Globes
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