Market Strategy - ILS: Short-Term Bounce Could Have Further To Run

The Bank of Israel (BoI) continues to cut interest rates aggressively, most recently slashing the lending rate by 50bps to 2.50% on Monday - the fourth move in less than two months. This is a record low, and comes in just 25bps above our end-2009 projection. We are leaving this in place for now, allowing for further cuts next year, possible as far as 1.50%, and then a return to tightening later on, depending on how the economic slowdown plays out. However, there are downside risks to our forecast.

As well as the rate cuts, the government has also announced an ILS21.7bn stimulus plan. The plan includes (1) accelerated investment in infrastructure (from 2010); (2) ILS1bn worth of credit for medium-sized businesses, ILS550mn for exporters, ILS180mn for small businesses; (3) injection of ILS350mn to state investment in research and development and; (4) strengthening the labour market by providing training and hiring subsidies.

Under pressure from the financial markets, the government has also announced plans to allocate ILS11bn in capital and guarantees, and provide tax exemptions for overseas investors to encourage foreign investment in the local market and boost liquidity. A total of ILS6bn will go towards guarantees to the banks for the raising of capital, while the remaining ILS5bn will be used to set up a number of investment funds in partnership with the pension institutions (provident funds, pension funds and managers' insurance providers) for the provision of non-bank credit and to deal with the refinancing of bonds.