Bank of Israel opts to leave interest rate unchanged at 0.25%
Highlighting factors including continued low inflation, strength of the shekel, developments and risks in the global and domestic economy.
By EYTAN HALONAmir 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 said its benchmark interest rate would remain at the current level of 0.25% on Thursday, confirming analyst expectations that reflected recent increases in foreign-currency purchases.It will be necessary to leave the interest rate unchanged for a “prolonged period,” the bank’s monetary committee said, or to reduce it to stabilize inflation around the bank’s target range of 1% to 3%.Factors influencing the committee’s decision included low inflation, the strength of the shekel, the monetary policies of major central banks, developments in the global economy and risks to the domestic economy.The committee has opted to keep the interest rate at 0.25% on nine consecutive occasions 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.“Growth in major economies is expected to continue to moderate in 2020, but the risks of a marked deterioration in the global economy declined, and growth is expected to improve in 2021. Likewise, there is greater certainty regarding the future path of major central banks’ monetary policy,” Bank of Israel Governor Prof. Amir Yaron told reporters following the decision.“However, in contrast, the interim government budget will have a contractionary effect in the coming months, and there continues to be considerable uncertainty regarding budget policy after the elections, and its ramifications.”Inflation over the past 12 months stood at just 0.3%, and the bank now forecasts inflation in 2020 to reach 1% – the lower end of the central bank’s target inflation range.While the shekel weakened slightly against the dollar since the bank’s previous interest rate decision in late November, while most other currencies increased in value, the shekel strengthened by 8.3% over the course of last year, pushing the inflation rate downward.“As long as demand in the economy continues to be strong, it will continue to act to increase the inflation rate, even if the forces acting in the opposite direction are likely to lengthen the time it will take until the inflation rate returns to within the target range,” said Yaron.The “striking” strengthening of the shekel, Yaron added, had continued “beyond what would have been expected as a result of the economy’s good macroeconomic fundamentals.” Accordingly, the bank had pursued “relatively significant” intervention in the foreign exchange market since its last rate decision.“I emphasize that the Bank of Israel is prepared to prevent excessive appreciation of the shekel, by purchasing foreign exchange whenever necessary, and particularly to the extent that we assess the appreciation is the result of relatively short-term financial factors,” he said.Referring to the probable contractionary nature of the government’s interim budget in the first half of 2020, rolling over on a month-by-month basis until a government is formed, Yaron added that business sector entities providing services to the government are likely to be impacted.“In addition, there is uncertainty regarding the fiscal policy that will prevail after the elections, as it is likely to be contractionary as well, should necessary steps to deal with the rising deficit be taken,” said Yaron.Israel’s fiscal deficit widened to 3.7% of GDP last year, missing the government’s 2.9% target by 0.8% or NIS 12 billion ($3.45b.), the Ministry of Finance announced on Monday. The deficit totaled NIS 52.2b. ($15b.) during the past twelve months, compared to NIS 38.7b. ($11.14b.) in 2018.“As long as the political and fiscal uncertainty continues, it sharpens the need to keep monetary policy accommodative in order to support growth,” Yaron said.
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