Bank of Israel keeps interest rate unchanged, hints at future cut

Bank of Israel Governor Prof. Amir Yaron stated that the decision to keep the interest rate unchanged "was not easy, and was not unanimous."

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October 7, 2019 22:04
2 minute read.
Bank of Israel keeps interest rate unchanged, hints at future cut

Prof. Amir Yaron, the tenth Governor of the Bank of Israel. (photo credit: MARC ISRAEL SELLEM)

The Bank of Israel’s monetary committee opted to leave the benchmark interest rate unchanged at 0.25% on Monday, but hinted that it could be reduced in the future to stabilize inflation.

“It will be necessary to leave the interest rate at its current level for a prolonged period,” stated the committee, “or to reduce it in order to support a process at which in the end, inflation will stabilize around the midpoint of the target range, so that the economy will continue to grow strongly.”

Although the interest rate has remained at 0.25% since November 2018, Bank of Israel Governor Prof. Amir Yaron acknowledged that the decision to keep the unchanged interest rate as is “was not easy, and was not unanimous.”

Key factors behind the monetary committee’s decision cited were: low inflation, the monetary policies of major central banks, the slowing global economy, and the continued appreciation of the shekel. The committee will publish its next interest rate decision on November 25.
Inflation during the past 12 months has stood at just 0.6%, with the bank’s research department currently forecasting inflation in 2020 to be 1.2%, 0.4 percentage points lower than previously forecast.

The appreciation of the shekel, the committee said, is “making it more difficult to return inflation to the target range” of 1% to 3% inflation. The shekel has strengthened by 1.2% since the previous interest rate decision at the end of August, and by 9.1% since the beginning of 2019.

In response to pressure for central bank intervention from manufacturers and exporters to prevent further appreciation of the shekel, Yaron said the bank was continuously monitoring the needs of the Israeli economy.

“Until now, as is known, the Bank of Israel has not intervened at a significant level in the foreign exchange market,” Yaron said. “There is a window of exchange rates that we view as being consistent with price stability and economic activity, when taking into account all the factors and variables in the economy. To the extent that the exchange rate deviates markedly from the window we defined, the Bank of Israel will intervene in the market.”

While the committee stated that economic activity in Israel is not being adversely affected by the negative global sentiment or by the political situation in Israel, Yaron said, “this is liable to change relatively rapidly” should the slowdown reach the capital markets and the technology industry.

According to the central bank’s research department, GDP is expected to grow by 3.1% in 2019, and by 3% in 2020. Economic growth in 2020 is expected to be 0.5 percentage points lower than previously forecast due to an expected decline in exports in response to the slowing of world trade, and due to the assumption that the government will soon be required to act to lower the deficit.


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