Prof. Amir Yaron, the tenth Governor of the Bank of Israel.
(photo credit: MARC ISRAEL SELLEM)
The Bank of Israel decided to leave its interest rate unchanged at 0.25% on Monday following the latest meeting of the bank’s monetary committee.
Future rises in the interest rate will be “gradual and cautious,” the committee said, in a manner which will stabilize inflation according to the bank’s inflation targets.
Economists at the bank’s Research Department expect the interest rate to increase to 0.5% toward the end of the third quarter of 2019 and to increase gradually to 1% by the end of 2020.
“At this stage there is uncertainty about several main factors that will impact on the policy in the near term – the development of the exchange rate, the global economy, and in particular monetary policy abroad, the development of the real economy, the policy that will be adopted by the new government, and others,” said Bank of Israel Governor Prof. Amir Yaron.
“At this time, according to the Monetary Committee’s assessment, the current level of the interest rate is in line with the state of the economy, and with the need to continue supporting the increase in inflation toward the midpoint of the target.”
Except for December 2018, the annual inflation rate has remained at 1.2% or higher over the past nine months, slightly above the lower bound of the bank’s 1%-3% target range. Inflation during 2019 is expected to reach 1.5%, and 1.6% in 2020, around the midpoint of the bank’s target range.
Referring to the bank’s annual report on the state of the economy published last week, Yaron said it was important that the new government act “as early as possible” to tackle the combination of increasing government expenditure and the simultaneous reduction of taxes which is increasing the nation’s structural deficit to a potentially undesirable level
Economic growth in the fourth quarter of 2018, the bank said, was in line with its long-term predictions, making clear that the mid-2018 slowdown was only transitory. The economy remains in a full employment environment and wage increases are continuing, led by the private sector.
The Research Department forecasts GDP to grow by 3.2% in 2019, lower than previously projected, and by 3.5% in 2020, in line with initial predictions.
“Notwithstanding the recovery in financial markets, economic activity worldwide continues to moderate, and the forecasts regarding growth in major economies and in world trade continue to be revised downward,” said Yaron.
“To the extent that interest rate increases in the US are in fact suspended, the maneuvering room for increasing the interest rate in Israel without narrowing the interest rate gap that opened in recent years will decrease to some extent.”
The benchmark interest rate has remained at 0.25% since November when the Bank of Israel surprised analysts – during the transition period between former governess Dr. Karnit Flug and Yaron – by raising the rate from an all-time low of 0.1% after more than three-and-a-half years without change.
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