November 27, 2018 / 1:40 PM / 20 days ago

Israeli markets show uncertainty over next rate hike

JERUSALEM, Nov 27 (Reuters) - Israeli markets were mixed on Tuesday after a surprise interest rate hike, with financial stocks gaining sharply while debt markets showed uncertainty over the future course of monetary tightening.

Counter to most analysts’ expectations, Israel’s central bank on Monday raised its benchmark interest rate to 0.25 percent from 0.1 percent, its first hike since mid-2011. It was also the first move since a rate cut in early 2015.

Stock indexes were buoyed by bank and insurance shares — sectors most sensitive to interest rates — although real estate stocks were largely down. Bond yields dropped and the shekel was mostly stable.

“The markets were definitely caught off guard,” said Saar Golan, a trader at the Meitav Dash brokerage, echoing the sentiments of others who said the Bank of Israel did not prepare the markets for a hike.

“We didn’t think we would see an interest rate hike until a good part of next year.”

The main Tel Aviv indexes were up 0.3 percent in afternoon trading, with financial shares outpacing the broader bourse on the view that higher rates will boost income.

In the debt market, Israel’s interest rate swaps were pricing in two more rate hikes in 2019 to 0.75 percent, although yields in government bonds have barely priced in one more hike.

“It’s unclear to the bond market where it should be,” said Yonnie Fanning, chief economist at ILS Brokers. “It will correct over time but the curve is off the mark.”

Israel’s benchmark 10-year bond yield jumped 10 basis points since the rate hike, while the bond yield maturing in January 2020 stands at 0.43 percent, up from 0.31 percent on Sunday.

Monday’s rate action came during a transitory period where the meeting was led by deputy governor Nadine Baudot-Trajtenberg, who said she expected rate hikes to be gradual and cautious.

The Israeli cabinet this month approved Amir Yaron, a professor at the University of Pennsylvania, as the new governor. He is expected to be sworn in next month, before the next policy meeting on Jan. 7.

“This was a borderline decision,” Golan said. “The data doesn’t support the view that rates will be increasing on a continual basis. Until we see data with real inflation and continued strong economic growth the Bank of Israel won’t be able to justify more rate hikes.” (Reporting by Steven Scheer, editing by Ed Osmond)

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