Bank of Israel Split on Rate for 1st Time in 3 Years

(Bloomberg) -- The Bank of Israel’s monetary policy committee split on its interest rate decision in February for the first time in three years, with one member reasoning that it’s time to raise borrowing costs that have been held steady throughout that time.

The central bank said in a statement that five members favored keeping the rate at the record low 0.1 percent level that’s held since March 2015, while one proposed ratcheting it up to 0.25 percent. The last time the monetary policy committee split was in February 2015.

While growth in Israel is well above 3 percent, inflation has remained near or below zero for almost four years, giving the Bank of Israel an incentive to keep rates low. The central bank has said it plans to maintain its accommodative policy as long as needed to entrench inflation within the government’s 1 percent to 3 percent target range.

The unidentified dissenting committee member said Israel’s low inflation rate didn’t reflect a problem with demand, and that less emphasis should be placed on the over-appreciated shekel. The economy’s switch to services exports from goods exports, and the growth in world trade, are expected to reduce the sensitivity of exports to the exchange rate, he argued.

The five committee members who voted to keep borrowing costs at their current 0.1 percent level reasoned that low rates would help to nudge the low inflation environment into the target band.

The appearance of a dissenting voice in the panel for the first time in three years doesn’t necessarily indicate that the committee is close to raising the rate, said Ofer Klein, head of economics and research at Harel Insurance & Financial Services Ltd. The dissenting voter may have been influenced by the depreciation of the shekel in February, something which in the meantime has reversed course, he added.

“We have one of the lowest inflation rates in the world,” Klein said. “Eventually, the interest rate will rise. But I don’t think we will see a rise before the end of 2018.”

Market response to the split vote was “very tame,” said Yonie Fanning, chief economist at ILS Brokers. The shekel gained as much as 0.2% to 3.483 shekels to the dollar, before dropping to 3.4438 at 3:50 p.m.

“To some extent, it shows that the committee is open to the idea” of raising borrowing costs, Fanning said. “But I don’t think it will happen until the entrenchment. It’s unlikely to happen in the coming year.”

The Bank of Israel is “rightly” maintaining a very accommodative policy, the Organization for Economic Cooperation and Development said in a March 11 report on the Israeli economy. Still, it warned that pursuing that policy too long carried risks, including overheating the economy.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel, Glen Carey

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