Israel Doesn’t Budge on Rates Despite Looming Price Declines

(Bloomberg) --

The Bank of Israel held off on cutting interest rates on Monday, opting to maintain its policy of foreign-currency purchases instead of pushing borrowing costs even closer to zero.

The monetary committee said that its key rate will stay at 0.25%, in line with the forecasts of all but two economists surveyed by Bloomberg. Policy makers also dedicated a paragraph in their decision to the deadly coronavirus outbreak, noting it was creating questions about future economic activity.

“It will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it,” the central bank said in a statement, maintaining its previous guidance. “The Committee is taking additional steps to make monetary policy more accommodative.”

With inflation languishing below the target range and expected to slip below zero in the coming months, the central bank is under pressure to loosen policy but has a limited set of tools available. Governor Amir Yaron has kept the benchmark on hold since his appointment in late 2018, preserving what little maneuvering room is left before butting up against negative rates.

It was the first decision since 2018 that the policy-making body operated with a full complement of six members after a pair of internal promotions, including the appointment of markets chief Andrew Abir as a new deputy governor.

Previously in charge of foreign-currency purchases, Abir told the Globes financial newspaper this month that there’s been “no change” in the central bank’s approach and interventions remained the preferred tool.

The shekel pared its losses after the decision and traded 0.4% weaker at 3.4302 versus the dollar as of 5 p.m. in Tel Aviv.

Global Emergency

The coronavirus, which has hammered the global economy for the past month, could also prompt new measures from the Bank of Israel -- particularly if major central banks ease policy. Israel reported its first case of the virus on Friday, and the following day the country’s Health Ministry imposed a quarantine on people who had contact with nine South Korean tourists who recently tested positive.

The central bank said the outbreak is “casting uncertainty regarding future economic activity globally and in Israel, and regarding the impact on inflation and on the financial markets.” But it added that “no significant macroeconomic impact” is expected in Israel should the spread be halted in the coming months.

“If the crisis persists and spills over into additional countries, and particularly if strict preventative measures are required in Israel, it is expected to have a more significant impact,” the committee said. “In such a scenario, the Monetary Committee has a range of tools to make monetary policy more accommodative.”

Rafi Gozlan, chief economist for Israel Brokerage and Investments Ltd. in Tel Aviv, said the rate trajectory depends to an extent on how major institutions like the International Monetary Fund or U.S. Federal Reserve react to the outbreak. “Because of local reasons, I don’t think they’ll lower rates. For global reasons -- yes,” Gozlan said.

But the likelihood of a rate reduction has been growing largely because an appreciating shekel continues to cap consumer costs, with markets pricing in increased chances of a cut over the past month. Inflation in January undershot estimates, coming in at 0.3% from a year earlier, well below the 1% to 3% target range. Economists see consumer prices declining as soon as next month, for the first time in three years.

Making a Stand

To combat a strengthening currency, the central bank has bought $6.5 billion in foreign exchange over the past three months in its biggest run of purchases in a decade. Still, the shekel has been resilient, raising the specter of changes to the Bank of Israel’s policy mix despite a professed preference for market intervention over rate cuts.

After notching one of the world’s biggest rallies against the dollar in 2019, the shekel is this year’s best performer of 31 expanded major currencies and the only one to rise against the dollar.

Some economists see a higher chance of a rate cut over the coming months, potentially even at the next decision in early April, which will be accompanied by a news conference.

One complication is an acceleration in economic growth last quarter despite expectations for a slowdown, raising questions about easing policy at a time when gross domestic product is expanding at the fastest rate in two years.

“The domestic economy is very robust, with real GDP growth running close to the potential growth rate, and hence does not require monetary stimulus,” JPMorgan Chase & Co. analysts including Yarkin Cebeci said in a report before the rate announcement.

“Since rates are already close to the lower bound -- and negative rates are not welcome -- the bank likely prefers not to waste this policy option in a buoyant growth environment,” they said.

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky

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