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Bank of Israel Cuts Growth Forecast, Holds Rates Before Election

Bank of Israel Holds Rates Steady Day Before National Vote

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The Bank of Israel held its benchmark interest rate steady at 0.25 percent Monday, the eve of national elections, but cut its economic growth forecast for this year amid a darkening global outlook.

Indicators are pointing to a possible slowdown in the country’s strong labor market, the bank said. It also noted uncertainty about future government policy -- Prime Minister Benjamin Netanyahu faces a tight re-election battle Tuesday against former army chief Benny Gantz -- and how that will impact the budget deficit and inflation.

“The overall tone was pretty dovish,” said Rafi Gozlan, chief economist for Israel Brokerage and Investments in Tel Aviv. “They see some kind of worsening in the global picture, and when you add to that the appreciation in the shekel, I think they’ll stay on hold at least for the coming few decisions.”

The bank has been in a holding pattern since it raised interest rates last November for the first time since 2011. Under new Governor Amir Yaron, it has said it plans to raise rates in a “gradual and cautious” path with the aim of stabilizing inflation around the midpoint of the target range. All 18 economists surveyed by Bloomberg predicted Monday’s rate hold.

The shekel reversed earlier gains after the decision, and weakened 0.17 percent against the dollar in Monday trading as of 5:56 p.m. Israel time.

Bottom of Range

The central bank’s research department on Monday cut its growth forecast for the year to 3.2 percent from 3.4 percent, predicting exports would underperform amid sluggish global trade. Researchers kept their rate forecast for end-2019 at 0.5 percent, while paring the rate outlook for late 2020 to 1 percent, from 1.25 percent previously.

Prices have risen more rapidly than expected over the past three months but remain near the bottom of the central bank’s 1 percent to 3 percent target range. With the shekel strengthening in recent weeks, the central bank said further appreciation could slow inflation’s rise to the midpoint of the target.

Yaron also noted that changing central bank policies abroad could impact Israel.

“To the extent that interest rate increases in the U.S. are in fact suspended, the maneuvering room for increasing the interest rate in Israel, without narrowing the interest rate gap that opened in recent years, will decrease to some extent,” he told reporters after the decision.

“We think that the window for rate hikes in Israel is rapidly closing,” Guy Beit-Or, head of macro research at Psagot Investment House Ltd., wrote in a research note. “In the likely event of rate cuts in the U.S. and around the world in 2020, we don’t see a scenario in which the BOI will hike.”

Bank of Israel Cuts Growth Forecast, Holds Rates Before Election

Most economists expect the central bank to raise rates in the third quarter of this year. One-year interest rate swaps show investors pricing in a growing chance of a rate hike over the coming year.

“What’s interesting is that the Bank of Israel, like other central banks, is taking a step back from the policy of monetary tightening,” said Alex Zabezhinsky, chief economist at Meitav Dash Investments Ltd. in Tel Aviv. “The Bank of Israel’s step is small compared to the Fed or the ECB, but it’s on the same course of gradual increases in interest, and even much more cautious.”

Despite the global slowdown, Israel’s economy has shown signs of resilience. GDP grew 3 percent in the final quarter of 2018, compared to economists’ initial forecast of 1.9 percent, driven by an uptick in private consumption. That expansion was higher than 2.7 percent in the previous quarter, but below the 2018 overall rate of 3.3 percent growth.

The next rates decision is May 20.

--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, Michael S. Arnold, Mark Williams

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