Israel Central Bank Reverses Policy Path, Joins Easing Wave

(Bloomberg) --

The Bank of Israel held its key interest rate steady at 0.25% but looked poised to join a global monetary-easing wave, dropping reference to a plan to lift borrowing costs gradually. The shekel dropped.

Until last month, Israel’s central bank was one of the few still intending to raise interest rates. But a deteriorating outlook for the global economy driven in large part by the trade war between China and the U.S. spurred a turn by major central banks toward easier policy that other countries have found almost impossible to resist.

Israel is the latest to turn, with the central bank dropping language from its previous statement that said it was on a path toward gradual and cautious rate increases. That was replaced in Wednesday’s statement with a new bias toward easing.

“The interest rate will not be increased for an extended period,” the Monetary Committee said in a statement accompanying the decision. “Moreover, if necessary, the Committee will take additional steps toward making monetary policy even more accommodative in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and to support economic activity.”

The decision came after Governor Amir Yaron issued an unusual statement at the end of July, in which he said the key rate won’t rise for a “long time.” Bank of America called that pledge a “neutral stance.”

Shekel Troubles

Yaron has been caught in a difficult position this year: his plan to raise interest rates has been complicated by the shekel’s world-beating appreciation. It’s the best-performing of 31 major currencies this year, gaining about 6% against the dollar and leaving inflation below the central bank’s target. The shekel dropped 0.3% to 3.5317 per dollar after Wednesday’s statement.

The latest move is unlikely to be sufficient to reverse the currency’s appreciation, according to Jonathan Katz, economist for Leader Capital Markets Ltd.

“This isn’t enough to talk the shekel down in my view,” Katz said by phone. “I still can’t see a rate cut and the most that I can envision is at some point, if the shekel keeps strengthening then they’ll intervene, but we haven’t seen it yet.”

Despite repeated warnings that the central bank could intervene to weaken the exchange rate, the currency has continued its run, and investors have begun to doubt Yaron’s resolve to do much about it.

The dilemma for Yaron is that with rates remaining near zero after a single hike since 2011, his room for policy maneuver is limited if there’s another downturn in the domestic or global economy. Unless Israel shows itself willing to follow some developed economies and experiment with negative borrowing costs, the central bank could find itself watching as inflation sags further below the target range of 1% to 3%.

A further decline in annual inflation is expected in the coming months, the central bank said on Wednesday. If the appreciation of the shekel persists, “it will be harder for a more extended period to return inflation to the target range.”

With Wednesday’s switch, Israeli policy makers “acknowledged a mistake and they fixed it now,” said Rafi Gozlan, chief economist for Israel Brokerage and Investments in Tel Aviv. “Look what’s going on globally, you cannot go in a totally different way than the other major central banks.”

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editor responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net

©2019 Bloomberg L.P.