Flug hints interest rates may drop

For the past two months, BoI has put the interest rate at .25%, the lowest it’s ever been, in order to battle sluggish inflation, weaken the shekel, and give the moderating economy a shot in the arm.

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October 12, 2014 23:00
1 minute read.
Karnit Flug

Karnit Flug . (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

Bank of Israel Governor Karnit Flug hinted on Friday that interest rates could fall below their already historic lows.

“As we’ve seen in other countries, the experience is that interest rates can go lower, and there are also other tools that central banks have been using, once you reach the zero bound, so there are quite a lot of policy tools in the tool kit,” she told Reuters television in an interview at the International Monetary Fund meetings in Washington.

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For the past two months, BoI has put the interest rate at .25%, the lowest it’s ever been, in order to battle sluggish inflation, weaken the shekel, and give the moderating economy a shot in the arm.

When pressed if she was considering policies such as Quantitative Easing – the massive asset-purchase program the US Federal Reserve employed to battle the recession – Flug remained mum.

“There are different tools, but I think that would not be the right moment to actually specify the tools. We will be following the developments and adjust our policies accordingly,” she said.

Flug also moderated criticism of Finance Minister Yair Lapid’s fiscal policies, perhaps because she was speaking to an international news outlet in English, and did not want to damage Israel’s economic reputation.

Though Lapid raised the 2015 deficit from the recommended 2.5% to 3.4%, further than she would have liked, she noted that the Finance Ministry had committed to lower the deficit to 2.75% in 2016. If that target were maintained, she continued, it would put Israel back on the path to debt reduction.

The Bank of Israel, however, noted last week that the current budget path would yield a 3.4% deficit in 2016 if it remained unchanged.

Either tax increases or major spending cuts will be needed to bring it back down to the target.

The cabinet approved the 2015 budget last week, and the Knesset is expected to pass it by the end of the year.


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