BOI panel treads cautiously, keeping rate steady at 1.25%

Inflation projections remained on the low end of the target and the shekel maintained a stubborn strengthening streak.

Bank of Israel 370 (photo credit: Wikimedia Commons)
Bank of Israel 370
(photo credit: Wikimedia Commons)
Despite macroeconomic indicators that suggested interest rates could drop, the Bank of Israel’s monetary committee on Monday maintained the rate at 1.25 percent.
“The decision to keep the interest rate for August 2013 unchanged at 1.25% is consistent with the Bank of Israel’s interest rate policy, which is intended to entrench the inflation rate within the price stability target of 1–3% a year over the next 12 months, and to support growth while maintaining financial stability,” the committee wrote in its report.
Yet, analysts noted, inflation projections remained on the low end of the target and the shekel maintained a stubborn strengthening streak. Ofer Klein, Harel Finance’s head of macroeconomic research, noted ahead of the decision that the International Monetary Fund revised its world economic growth downward, consumer confidence was lagging, and the Bank’s own Composite State of the Economy Index indicated slow growth.
“Most of the indicators point to a drop in the interest rate,” Klein said.
Even housing prices, which had grown sharply in the previous year, had leveled off, giving the bank more leeway to lower the rate. International rates remained low.
Leaving the interest rate in place, he said, would be a sign of caution. At an already low 1.25%, the interest rate does not allow the committee many opportunities to lower the interest rate as a policy tool. Further, the committee is awaiting the nomination of Jacob Frenkel as the new governor, and may be trying to avoid “rocking the boat” before he enters the position.
“The Bank of Israel took the easy decision, maintaining the status quo until the new governor enters the position, leaving one more bullet in the cartridge,” said Nir Omid.
Vice president Tamir Fishman Portfolio Management.
Pioneer Financial Planning’s Shmuel Ben-Arie agreed, saying, “It seems that the lack of a governor in practice delayed the decision for reasons which are not macroeconomic.”
Frenkel, he mentioned, is seen as an inflation hawk, so “it will be interesting” to see how he will take other factors into account.
“The incoming governor will have to act along different lines than we were used to seeing from his in his last term, and soon we will see another interest rate drop soon” he said.