Bank of Israel leaves interest rate unchanged at 0.25%

"This assessment is based on a large number of parameters regarding which uncertainty is particularly high at this time, and that could change by the next interest rate decision."

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July 8, 2019 19:46
2 minute read.
Amir Yaron speaks during a ceremony whereby he is sworn in as Bank of Israel governor by Israel's Pr

Amir Yaron speaks during 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)

 
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The Bank of Israel left its base interest rate unchanged at 0.25% once again on Monday, citing especially complex monetary committee discussions due to a moderate rise in inflation, election uncertainty, and worrying developments in the global economy.

The interest rate has remained at 0.25% since November 2018, when the Bank of Israel surprised analysts by raising the rate from an all-time low of 0.1% after more than three-and-a-half years without change.

Economists in the central bank’s research department forecast that the interest rate will be increased at the end of the third quarter of 2019, but Bank of Israel Governor Prof. Amir Yaron cautioned that the expected rate hike could be delayed.

“This assessment is based on a large number of parameters regarding which uncertainty is particularly high at this time, and that could change by the next interest rate decision,” Yaron told reporters.

Rises in the interest rate, the monetary committee reiterated, will be “gradual and cautious” in a manner that will lead to the stabilization of inflation according to the midpoint of the bank’s 1% to 3% target range.

“Downward surprises in data to be published regarding inflation and growth in Israel, a decline in assessments of future inflation, the risk of a further deterioration in the global economy, changes in monetary policy by major central banks, and the possibility of shekel appreciation – all of these, if they materialize, could lead to an increase in the interest rate occurring at a later date than that in the Research Department’s forecast,” Yaron cautioned.

In May, the one-year inflation rate increased to 1.5% for the first time since 2013, and is expected to stand at 1.6% in 2019 and 2020. The bank’s research department assesses that GDP will grow by 3.1% in 2019, revised down from 3.2% in its previous forecast. GDP is projected to grow by 3.5% in 2020.

While Yaron also expressed “uncertainty regarding the government’s post-election policy” and its potential impact on prices, he highlighted very low unemployment, the tight labor market, and increasing wages as factors supporting continued increase in inflation. A main risk to inflation continuing to increase, Yaron added, is the continued appreciation of the shekel exchange rate, which has strengthened by 4.3% in the past year but stabilized in recent weeks.

The main source of worry for the bank recently, Yaron said, has been developments in the global economy, citing weakness in the economies of Europe and emerging markets, and signs of a possibility of a slowdown in the United States.

“The growth in world trade halted, and the ‘trade war’ is the main factor weighing on sentiment of real activity and on financial markets,” Yaron said. “Although at the G20 summit a further deterioration was avoided, the growth forecast for most regions was again revised downward, and there are additional political and geopolitical risks in the world.”

Yaron highlighted weakening inflation, deviating further from targets guiding central banks and leading to expectations of a turnaround in global monetary policy, notably the possibility of an interest rate reduction by the Federal Reserve as early as its next meeting at the end of the month.

The next decision regarding the bank’s interest rate will be published on August 28.
 

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