Bank of Israel Holds Rates as Flug Reappointment in Doubt

(Bloomberg) -- The Bank of Israel held its benchmark interest rate steady again as questions loomed over the direction of monetary policy with Governor Karnit Flug’s reappointment in doubt.

The decision was predicted by all 16 economists surveyed by Bloomberg. With most economists and investors not expecting major changes to the lending rate this year as long as Flug is at the helm, the key question is who will become governor when her term ends in November.

Amid growing tension between the central bank and Finance Ministry, more than 70 percent of economists do not expect Flug to be reappointed for a second term, according to a Bloomberg survey. Economists see Eugene Kandel, a former National Economic Council chairman, as the most likely candidate to succeed her.

It’s “not important right now who will be next governor,” Flug told reporters after the rates decision. The more important consideration is to maintain the bank’s independence, she said.

Four of the 11 economists surveyed said change is a good thing for the bank. Seven predicted a new governor will take the central bank down a more hawkish path.

Strong Growth

Data released earlier Monday showed Israel’s economy grew 4.1 percent in the fourth quarter of 2017, and expansion likely continued at a similar pace in the first quarter of this year, perhaps even faster than the potential growth rate, the BOI said in a statement accompanying the rates decision. The bank’s research department kept its forecasts for economic growth unchanged, at 3.4 percent this year and 3.5 percent in 2019.

As in much of the developed world, where higher growth isn’t driving up prices quickly, Israeli inflation has hovered near zero for more than three years. The BOI statement noted signs that inflation is picking up, though it remains well below the bank’s target range. The research department maintained its inflation forecast of 1.1 percent by the end of the year.

Weak price pressures and a shekel near all-time highs against a basket of currencies have led the bank to keep its benchmark rate at 0.1 percent since March 2015. Israel, which relies on exports for more than 30 percent of its growth, is sensitive to its exchange rate and the central bank has accumulated foreign currency in recent years to keep the shekel from strengthening too fast.

The shekel weakened slightly after Monday’s rates decision, depreciating 0.3 percent to 3.5082 against the dollar as of 4:18 p.m. in Tel Aviv.

Global Risks

While the global recovery is proceeding apace, the BOI statement noted growing risks to the outlook. Addressing reporters after the decision, Flug cited geopolitical tensions and the chances of a trade war as potential risks.

Flug says the government needs to do more if it wants Israel’s economy to catch up to Europe and the U.S. She has pushed the government to invest more in infrastructure rather than cut taxes, which has sparked clashes with Finance Minister Moshe Kahlon, who has pushed for tax cuts.

After the bank’s annual report last month criticized Kahlon’s housing plan, Finance Ministry officials slammed Flug and Israeli media reported she wouldn’t be reappointed for a second term.

In its statement and at Flug’s presser, the bank said the housing market is showing signs of cooling, noting a slowdown in both prices and construction activity.

--With assistance from Harumi Ichikura

To contact the reporter on this story: David Wainer in Tel Aviv at dwainer3@bloomberg.net.

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

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