June 27--In talks today between Governor of the Bank of Israel Karnit Flug, leading macroeconomists, and the other members of the Monetary Committee at their meeting with economic forecasters, Flug expressed concern about events in the corporate bond market, even hinting at a problem with pricing risks in that market. The volume of investment in these bonds has boomed since the beginning of the year, while the proportion of corporate bonds in the public's asset and pension portfolios has grown.
The governor also commented on expected developments in the interest rate, the Bank's chief policy tool. Despite the sharp fall in the shekel-dollar exchange rate, which remains low, trading today at around NIS 3.43/$, the Bank of Israel Research Department believes that that the Monetary Committee will not further cut the interest rate. Starting in early 2015, it is believed that the interest rate will rise by just under 0.25% each quarter until it reaches 1.5%. The Bank of Israel interest rate currently stands at 0.75%, a historic low. This assessment by the Bank of Israel Research Department is surprising, because the Research Department revised its growth forecast for the year down to 2.9% and left its 2015 growth forecast at only 3% (including natural gas revenue). Excluding gas, this reflects very low growth of 2.5-2.6% in the next two years.
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