Israel’s Rate Hike Could Be One and Done After ‘Mistake’ in 2018
(Bloomberg) -- Israel’s first increase in interest rates since 2011 is looking more like an aberration by the day.
The surprise decision, made three months ago at the only monetary committee meeting led by an interim head, was meant to usher in a normalization that would mark the end of an era of record-low borrowing costs. Now, however, even the new governor’s preference for “gradual and cautious” tightening is increasingly in doubt.
On Monday the bank again held its benchmark rate steady at 0.25 percent after unexpected good news earlier this month on economic growth and inflation. Economists surveyed by Bloomberg unanimously had forecast rates to remain unchanged, after the bank raised them from all-time lows in November.
The urgency to press ahead isn’t the same after the shekel’s best month against the dollar in almost two years and tepid inflation at home accompanied a dovish turn by many of the world’s central banks.
The November rate increase “was a mistake,” said Amir Kahanovich, chief economist for Excellence Investment House, who sees a deceleration in inflation and economic growth. Going forward, the options are to leave rates at their current “level or to take them down,” he said.
A Bloomberg poll found the key rate will probably end the year at 0.5 percent, a quarter point less than predicted in the previous survey. Swaps that gauge rate expectations a year from now indicate only nine basis points of tightening.
“We’re going to be stuck with low rates,” said Jonathan Katz, chief economist at Leader Capital Markets Ltd. “There’s going to be very little justification to tighten.”
Back when the central bank lifted rates from near zero, the then-acting governor called the economy “ripe for this change” and saw inflation stabilizing within the target range of 1 percent to 3 percent. Instead, the growth outlook has since weakened, while inflation decelerated and then rebounded only slightly to an annual 1.2 percent in January, thanks mostly to volatile fruit and vegetable prices.
Officials were expecting economic growth to slow toward the end of 2018, but instead gross domestic product growth last quarter surprisingly accelerated, exceeding forecasts on a rebound in consumer spending. For the year, the statistics bureau estimates GDP growth eased to 3.3 percent from 3.5 percent in 2017, not far off what the central bank has said is its long-term potential.
The outlook for this year isn’t much more promising. Analysts surveyed by Bloomberg cut their GDP growth forecast to 3.3 percent for 2019, from 3.4 percent previously.
The new governor has shifted the goalposts on inflation by saying he wants to see it around the 2 percent midpoint of the range, a level Israel last reached in 2013. The central bank’s research department predicts inflation would edge up to 1.3 percent by the end of the year, with the benchmark rate rising to 0.5 percent by the third quarter.
Policy makers are starting to concede that price pressures are weakening. Speaking at a London investor conference Feb. 18, Deputy Governor Nadine Baudot-Trajtenberg said medium and longer term inflation expectations “have gradually moved below the midpoint of the target range.”
“That trend of gradual increase which had been observed during the summer and fall months seemed to have paused toward the end of the year,” she said.
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