Defying predictions, Bank of Israel leaves interest rate unchanged

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% .

By EYTAN HALON
Stacks of Israeli shekel notes [Illustrative] (photo credit: NIR ELIAS / REUTERS)
Stacks of Israeli shekel notes [Illustrative]
(photo credit: NIR ELIAS / REUTERS)
The Bank of Israel announced that its benchmark interest rate would remain unchanged at 0.25% on Monday, despite analyst predictions that the bank would follow the trend of recent cuts made by the Federal Reserve.
Citing low inflation, the monetary policies of major central banks, the slowing in the global economy and continued appreciation of the shekel, the central bank’s Monetary Committee said “it will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it” to stabilize inflation and to ensure strong continued economic growth.
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.
“Economic activity continues to grow near its potential rate, despite the negative global sentiment,” said the committee, but emphasized that “continuing uncertainty” regarding the domestic political situation could have a negative impact on the economy.
Highlighting the lack of a budget for 2020 due to the ongoing political impasse, the bank warned that “if the government is forced to operate on a continuance budget for a prolonged period” then it may have a contractionary effect on the market.
In the past 12 months, inflation stood at 0.4%, significantly below the central bank’s target range of 1% to 3%. Despite the decline, the bank’s one-year expectations remain stable around the lower bound of the target range.
While the value of the shekel remained stable overall since the previous interest rate decision on October 7, the bank said that the appreciation of the currency by 8.9% since the beginning of the year “continues to make it difficult to return inflation to the target range.” Home prices continued to climb moderately during the past two months, the bank said, increasing by 1.9% in the past year.
Addressing the global economic slowdown, the bank said the deterioration in world trade is continuing but that the “risk of significant worsening” in view of the US-China trade war and Brexit has declined. Despite the Fed’s decision to cut its rate by a quarter-point on October 30, the bank highlighted the Fed’s intention to leave the rate at its current level “unless there is a significant change in the state of the economy.”
Ofer Klein, the head of economics and research at Harel Insurance, said there still remains a strong chance that interest rates will be cut in the coming months.
“As we expected, and contrary to most market estimates, the Bank of Israel left interest rates unchanged at 0.25%,” said Klein. “The tight labor market, the stability of economic activity and the respite that central banks around the world took by reducing interest rates were key contributors to the decision.
“However, based on our estimation, the likelihood of interest rate cuts in the coming months – as well as foreign exchange purchases – remains significant, especially if we witness a rapid appreciation of the shekel.”
According to statistics also published on Monday by the Central Bureau of Statistics, the country's unemployment rate fell to 3.4% in October - the lowest rate since 1978. The rate of unemployment among men stood at 3.1% in October, and 3.7% among women.
"This morning we received news of a historic low in unemployment," said Finance Minister Moshe Kahlon, welcoming the news. "Low unemployment indicates a strong economy and, no less important, a strong society. Every person wants to get up in the morning, go to work and support their family with respect. I am very happy and proud of this important figure, which has both an economic and social aspect.
The next decision regarding the bank’s interest rate will be published on January 9, 2020.


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