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Bank of Israel Holds Interest Rate, Said to Buy Dollars

The Bank of Israel left the benchmark lending rate unchanged for a fourth month, then promptly began buying dollars to weaken the shekel, according to people active in the currency market.

The five-member monetary policy panel, led by Governor Karnit Flug, kept borrowing costs at 1 percent, citing a pickup in the economy and rising home prices. Twenty of 23 economists surveyed by Bloomberg forecast the decision, while the remainder predicted a quarter-point cut.

“Data that became available this month indicate that the economy is continuing to grow at a moderate pace, with improvement in the fourth quarter of 2013 compared with the third quarter,” the Bank of Israel said in the decision. “There was an increase this month in home prices and in mortgages granted.”

Shortly after the decision, the central bank bought $100 million to $200 million, said Tal Zohar Avda, chief executive officer at Fxcm Israel Ltd. It was trading at 3.4956 to the dollar at 6:23 p.m. The Bank of Israel declined to comment on reports of its intervention.

Surging Currency

The Bank of Israel cut rates three times last year in an effort to weaken the shekel and boost exports, which account for about one-third of economic output and stagnated last year. The currency climbed 7.5 percent against the dollar in 2013, the most of 31 major currencies tracked by Bloomberg.

“The Bank of Israel has thrown in the towel in the world battle to weaken local currencies,” said Eldad Tamir, chief executive officer and owner of Tamir Fishman Ventures. ‘Unfortunately, the strong shekel continues to hurt the Israeli economy, creating damage that I think is disastrous.’’

The Bank of Israel also purchased about $5.3 billion in foreign currency in 2013 in an effort to contain shekel gains, bringing reserves to a record $81.8 billion at the end of December.

Economic growth accelerated to an estimated 3 percent in the fourth quarter of 2013, Rafi Gozlan, chief economist at Tel Aviv-based I.B.I. Israel Brokerage and Investments Ltd. said, compared with 2.3 percent in the previous three months.

Inflation remained tame, with consumer prices rising 1.8 percent last year. Housing prices, though, continued to march upward, increasing by 8 percent over the 12 months through November, the government reported Jan. 15, driven up by Bank of Israel rate cuts that encouraged mortgage-taking.

“The improved global outlook and tapering of bond purchases in the U.S. allow the Bank of Israel to bide its time and hope the foreign currency market trend will change,” said Ori Greenfeld, an economist at Tel Aviv-based Psagot Investment House Ltd. “If the change doesn’t come about, and the shekel continues to strengthen, the Bank of Israel will reduce the rate again”

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

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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