Bank of Israel: No interest rate hike ‘for extended period’

The next decision regarding the benchmark interest rate will be published on October 7.

By
August 28, 2019 17:39
2 minute read.
Amir Yaron attends a ceremony whereby he is sworn in as Bank of Israel governor by Israel's Presiden

Amir Yaron attends a ceremony whereby he is sworn in as Bank of Israel governor by Israel's President Reuven Rivlin, in the presence of Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon, in Jerusalem December 24, 2018.. (photo credit: AMIR COHEN/REUTERS)

The Bank of Israel’s monetary committee decided to leave its benchmark interest rate unchanged at 0.25% on Wednesday, stating that the rate will not be increased “for an extended period.”

While the central bank headed by governor Prof. Amir Yaron has not raised its benchmark interest rate again since a surprising November 2018 hike to 0.25%, economists in the central bank’s research department previously forecast that the interest rate could be increased again later this year.

That forecast is no longer likely, however, due to a sharp slowdown in inflation in Israel, increasingly accommodative monetary policies of major central banks, the slowing global economy and the continued appreciation of the shekel.

The committee’s statement mirrors a rare intervention made by Yaron in July, amid drastic appreciation of the shekel and the Fed’s decision to lower its benchmark rate, that a further hike would be unlikely “for a long time.”

“If necessary, the Committee will take additional steps toward making monetary policy even more accommodative in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and to support economic activity,” the committee said in a statement.

“The Bank of Israel continues to monitor developments in inflation, the real economy, fiscal policy, the financial markets and the global economy, and will act to attain the monetary policy targets in accordance with such developments.”

Inflation in the past 12 months was 0.5%, the committee said, significantly below the bank’s 1% to 3% target range, and a further decline in the year-over-year inflation rate is expected over the coming months. Although short- and medium-term inflation expectations declined, long-term expectations remain near the midpoint of the target range.

“Since the previous interest rate decision, the exchange rate has been volatile, with the shekel strengthening by 3% in terms of the nominal effective exchange rate since the last interest rate decision, and by 8.7% since the beginning of the year,” the committee said. “To the extent that the appreciation persists, it will be harder for a more extended period to return inflation to the target range.”

Despite negative global sentiment, the committee said Israeli economic activity continues to grow at near its potential rate. Uncertainty regarding government measures to reduce the fiscal deficit following the elections, however, is “leading to increased uncertainty about developments” in the domestic economy. The next decision regarding the benchmark interest rate will be published on October 7.

The committee also cited growing risks to the global economy since the last interest rate decision in July, especially the intensification of the trade war between the United States and China.

Following the Fed’s decision to lower interest rates last month, the committee said, further reductions to interest rates and increased monetary accommodation in major economies are expected.


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