World's Dovish Trend Bypasses Israel for Now as a Rate Hike Looms

(Bloomberg) -- Caught between major central banks eyeing monetary stimulus and a strong local economy, the Bank of Israel surprised by sticking to its previous forecast of raising borrowing costs by the end of September.

A rarity on the world stage for its intention to boost interest rates, Israel’s central bank confounded some economists who think it will be extremely difficult to hike this year in the face of a stronger shekel and deteriorating global prospects. But the latest quarterly forecast from the bank’s research department showed no change in outlook as the monetary committee kept its key rate at 0.25% on Monday.

“They are moving to a cautious wait-and-see bias,” said Kubilay Ozturk, a Deutsche Bank AG economist who expects no hike this year. “There is so much uncertainty for them.”

In the months following Israel’s first hike since 2011 in November, gains in the shekel and a dovish turn by global central banks have raised questions about Governor Amir Yaron’s plans to pursue a “gradual and cautious” path toward higher rates. Analysts at global lenders including Goldman Sachs Group Inc. and JPMorgan Chase & Co. say the pause will last well past this year.

Israel’s currency, already among the world’s best performers against the dollar this year, traded 0.2% stronger after the rate announcement.

“Policy makers respond first and foremost to domestic developments,” Yaron said at a news conference in Jerusalem. “It could be that in the framework of the gradual and cautious path toward which the committee is pointed, it will be necessary to raise the interest rate in one of the upcoming decisions.”

The monetary committee pointed to a slight pickup in inflation and the stabilizing of the shekel in recent weeks as reasons to stick with its plan. The bank’s research department also reiterated its forecast that rates will rise twice more in 2020.

Coming after a period when the Bank of Israel raised heightened concerns over the shekel’s strength and noted a lack of major changes to inflation -- which is still below the midpoint of its target range of 1% to 3% -- the latest rhetoric from Yaron suggests “they can very much act at any moment,” said Michel Nies, an economist for Citigroup Inc.

Yaron was sure to caution that much remained unclear, including what new elections mean for Israel’s fiscal situation, or the risk of further deterioration in the global economy.

In its quarterly forecast, the research department slightly trimmed its outlook for economic growth in 2019 to 3.1%. The Bank of Israel also noted that the trade outlook for “most regions” was revised downward, in light of the trade war between the U.S. and China, and geopolitical tension in the Persian Gulf and Europe.

“The Bank of Israel’s hands are tied,” said Guy Beit-Or, head of macro research at Psagot Investment House Ltd. “The interest rate will remain unchanged within the foreseeable future.”

--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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