Bank of Israel Holds Rate as Inflation Expected to Dip Again

(Bloomberg) -- The Bank of Israel held its benchmark interest rate at 0.1 percent and pushed back the date of its first expected rate increase, with inflation expected to dip temporarily below the bank’s target range .

All 17 economists surveyed by Bloomberg had predicted the bank would keep rates steady at Monday’s meeting, the last with Governor Karnit Flug at the central bank’s helm. With the rise in consumer prices still at the low end of the bank’s 1 percent to 3 percent target band, the BOI’s research department said it now expects rates to rise only in the first quarter of 2019, compared to previous expectations for a rate increase late this year.

“The inflation environment is still not yet sufficiently entrenched” to raise the benchmark rate, Flug told reporters after the decision. Any decision to raise rates “will be data-dependent, and will not be date-dependent. It will not be set in advance for a specific time.”

The change in the forecast took the market by surprise. The shekel, which was already down against the dollar Monday, declined another 0.2 percent after the decision and was trading at 3.6426 to the dollar as of 4:58 p.m. in Jerusalem. One-year swap rates, an indicator of investor expectations for rates in the period, fell 11 percent, the most in 2 months, to 0.28 percent.

If the expected decline in inflation is only temporary, “that’s not a good enough reason to hold back the rate hikes,” said Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv. “To postpone it again and again is a little confusing to the market.”

More Entrenched

Israel’s economy is benefiting from healthy growth and low unemployment. S&P Global Ratings acknowledged that strength in August when it raised Israel’s sovereign rating one notch to AA-, its fourth-highest level, assessing the economy will grow 3.3 percent in each of the next four years.

Flug, who will step down next month when her five-year term expires, has signaled the central bank would like to see inflation remain entrenched in the target range for a few months before raising rates. Annual inflation dropped to 1.2 percent in August, down from 1.4 percent the previous month, and the monetary policy committee said Monday it expects inflation to experience a “transitory decline” below the target.

Longer term, the committee said the forces driving prices higher remain in place. The main risk to inflation, the committee said, would be a sharp appreciation of the shekel, which has gained 0.2 percent against a basket of currencies since the bank’s last rate decision in August.

Flug also touched on the issue of her successor. Finance Minister Moshe Kahlon and Prime Minister Benjamin Netanyahu have been meeting with candidates to replace Flug, who has clashed with them over how to manage the economy, but have yet to settle on a candidate. Flug said her deputy, Nadine Baudot-Trajtenberg, could take over temporarily if no permanent replacement has been chosen in time.

Flug said the uncertainty over her successor had no impact on the monetary committee’s deliberations. But Shmuel Ben Arie, head of investments for Israel at Pioneer Wealth Management Ltd., said one reason for keeping rates on hold may be that Flug didn’t want to change tack just before leaving her post.

“When you look at the state of the economy, it doesn’t make sense that the interest-rate environment will remain near zero,” Ben Arie said in emailed comments.

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