Bank of Israel easing on hold for now

The ILS is at historical highs but is experiencing fundamental appreciation pressures. 

According to Bank of America, the BoI is likely to continue with small FX interventions to try to keep it at current levels in nominal effective exchange rate terms, or might even allow appreciation. The bank anticipates the BoI would only cut rates if interventions are not enough and the ILS appreciates by 3-5% from here.

The BoI will keep rates unchanged until the end of 2016, instead of cutting to zero this year in our previous baseline. The BoI is likely to stay on hold with rate cuts and hang on to its ammunition, unless ILS appreciation continues. The BoI appears less dovish and prefers to continue with FX interventions instead of easing for now. Analysts believe further easing is a possibility, and that cutting rates to zero, negative rates and quantitative easing remain data-dependent possibilities.

"As a result, we do not believe the BoI will respond to the Fed hike, which we expect in September. We push our expectation of the BoI's first hike back from 2Q 2016 to 1Q 2017, as in our view inflationary pressures are unlikely to build up and inflation will stay within the target range. We forecast the key rate to reach 0.5% by the end of 2017", said Bank of America in a report on Tuesday. 

Currently, markets are pricing the BoI staying on hold in 2015, with the first 10bp hike in March 2016 and rates at 0.6% by the end of 2016.