Bank of Israel Hike Hint Heats Up Shekel

(Reuters) -

Israeli bond yields jumped and the shekel strengthenedon Tuesday after by Karnit Flug, head of the central bank, suggested a monetary easing cycle that began in 2011 was over and the next interest rate move would be a hike.

“It’s still data-dependent but (Flug) clearly is thinking (the easing) is over,” said Barclays economist Daniel Hewitt. “She is trying to make it to the point where the (U.S.) Fed starts raising rates and then it will be easier for (Israel’s central bank).”

Bonds sold off across the curve, with yields up as much as 24 basis points. The shekel rose 1.3 percent against the dollar to an eight-month high of 3.78.

Ofer Klein, head of economics and research at Harel Insurance and Finance, said the comments may have come off stronger than Flug intended, so the bank was likely to respond with “continued foreign exchange purchases and more dovish statements in the future.”

According to Bank of Israel economists, the key rate will stay on hold through 2015 and gradually start to rise in 2016.

Flug also said the shekel was a bit overvalued, so in the absence of further rate cuts, the central bank will likely have to remain active in the market.

The Bank of Israel has cut its key rate 13 times since late 2011 from a high of 3.25 percent.