Flug 'will not hesitate' to use unconventional tools'; keeps interest rate at 0.1%

"The steps are certainly on the table, and if we think there is a need, we will use these tools or others as we see necessary," BoI governor says.

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September 24, 2015 18:35
3 minute read.
Karnit Flug

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

 
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The Bank of Israel’s monetary committee on Thursday left the interest rate unchanged at its record low of 0.1 percent. But BoI Governor Karnit Flug reiterated the bank’s willingness to use unconventional monetary policy if necessary.

Noting that Israel’s economic circumstances had changed since the June meeting where she said unconventional tools were less likely to be used, Flug told reporters she would “not hesitate” to take steps such as negative interest rates or quantitative easing if they were warranted.

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“The steps are certainly on the table, and if we think there is a need, we will use these tools or others as we see necessary,” she said.

The decision to maintain the current monetary policy, which Flug reminded reporters was “expansive,” came despite stagnant economic growth in the second quarter and negative inflation. BoI forecasts estimated that both were the result of temporary or one-time factors.

August inflation was, once again, unexpectedly low, coming in at minus-0.2% instead of remaining stable as forecasters had predicted.

Over the past 12 months, prices fell by 0.4%.

Despite the consistent fall in prices, the central bank maintained that the negative inflation was not the result of entrenched factors, and it was on track to get back to the target range of 1%-3% by the end of next year.



“Several one-off factors are expected to act in the coming months to reduce the CPI: The decline in electricity prices, the cancellation of the television fee, and the effect of the VAT reduction are expected to reduce the CPI by 0.7 percent in the next three months,” the central bank wrote in its report.

When energy, food and fruit and vegetables were removed from the equation, prices rose by 0.8%, the bank noted.

The 0.1% growth in the second quarter, which was dragged down by falling exports and investment levels, was also a fluke, it said. A major strike at Israel Chemicals and a correction in the market for cars had a disproportionate effect in that quarter, Flug said.

“Indicators of economic activity that became available this month support the assessment that the economy is growing at a moderate rate and that the sharp decline in the growth rate in the second quarter was transitory, despite the slight downward revision in the second estimate of national accounts data for the first quarter,” the report said.

Yet even with growth prospects not reaching the near-recessionary levels of the second quarter, the bank’s staff reduced its GDP growth expectation for 2015 to 2.6% from 3.0% in the previous forecast and down to 3.3% from 3.7% for 2016.

The decision not to reduce the interest rate or employ unconventional tools follows last week’s decision by the US Federal Reserve to postpone its first interest-rate increase since dropping rates to near-zero nearly six years ago.

The Fed decision was expected to add pressure on the Bank of Israel to take further action.

The BoI report on the interest- rate decision noted: “The forecast is that the interest rate will remain lower than the US federal funds rate, as projected by the leadership of the Federal Reserve, for some time.”

Some analysts said they did not foresee rates in Israel rising for some time.

“According to our assessment, the Bank of Israel will find it difficult to raise interest rates in 2016 due to the moderate inflation environment, meaning that an interest-rate gap with the US will grow and support the continued depreciation of the shekel in 2016,” Leader Capital Markets chief economist Yonatan Katz said.

When the Fed does raise its rates, Flug said Thursday, it will be a positive reflection on its economy, which will indicate a positive development for the global economy in general and Israel’s economy in particular.


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