Israel Backs Off Rate Hike as Governor Now Sees Long Pause Ahead

(Bloomberg) -- Bank of Israel Governor Amir Yaron said the country’s key interest rate won’t rise for a “long time,” backing down from a statement only weeks ago that it could be necessary to lift borrowing costs at one of the coming decisions.

The abrupt shift for one of the few central banks that still intended to tighten policy reversed the shekel’s gains on Wednesday, hours before the U.S. Federal Reserve is widely anticipated to deliver its first rate cut in a decade.

Among the reasons for a change in outlook since his July 8 remarks, Yaron cited a steep inflation slowdown and the strengthening of expectations that major central banks including the Fed would take expansionary measures.

Market Reaction

• The shekel reversed course after the remarks, to weaken 0.2% against the dollar as of 2:38 p.m. in Tel Aviv, trading at 3.4992.

Key Insights

• Yaron said in his statement that “if needed, we have at our disposal additional tools,” likely seeking to reassure markets and analysts that the Bank of Israel would be able to cope with a future slowdown despite its near-zero rates
• While the shekel weakened on the statement, it remains below the psychologically important 3.5 level against the dollar -- a sign of the currency’s resilience
• The remarks align the central bank closer with the expectations of outside economists, who have been incredulous that it would raise rates in the third quarter as its research department forecast in July
• Israel’s benchmark has been at 0.25% after a surprise increase in November, its first since 2011

Get More

• For more info on the central bank’s last decision, click here.

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

©2019 Bloomberg L.P.