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Israel Holds Rate in First Decision Since Flug Nomination

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Oct. 28 (Bloomberg) -- The Bank of Israel left the benchmark lending rate unchanged in its first decision since the cabinet approved Karnit Flug as governor, as it assesses the impact of last month’s cut.

The five-member monetary policy panel kept borrowing costs at 1 percent, the lowest in four years. Twenty-three of 24 economists surveyed by Bloomberg had forecast the decision, while one predicted a quarter-point cut.

“The Bank of Israel prefers to wait and see the impact of the last rate cut, even though it is clearly worried by developments in the export sector,” said Ilan Artzi, chief investment officer at Halman-Aldubi Investment House in Tel Aviv. A shekel trading about 3.5 to the dollar “doesn’t ease concerns,” he said, predicting another cut down the line.

Since 2011, the central bank has reduced the key rate from 3.25 percent to spur the country’s export-driven economy, which has been hurt by a strong shekel that has made exports less competitive. It also began buying dollars in April to curb the currency after a lull of almost two years, including $835 million in September. Last week, Finance Minister Yair Lapid said the shekel was “too strong” and that he would work with Flug, whose appointment the cabinet approved yesterday, to weaken it.

Interest rate swaps and the shekel both gained after today’s rate decision, and some analysts said the Bank of Israel move signaled that no more cuts were in the offing.

Other Ways

“For now, the rate will hold,” said Ori Greenfeld, economist at Psagot Investment House Ltd. “The Bank of Israel understands the rate cuts’ effect on the currency exchange rate is weakening. The bank will probably try other ways to influence the currency exchange rate, and maybe even do something with the Finance Ministry to try to weaken the shekel if necessary.”

The Bank of Israel noted in its decision that it has reduced rates by 75 basis points since May, including a quarter-point cut last month. It said the shekel’s appreciation halted over the past month, with the currency weakening 0.7 percent against the dollar while most currencies strengthened.

“The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel,” the central bank said in a statement announcing the decision.

Growth Slowing

The bank expects economic growth to slow to 3.4 percent in 2014 from 3.6 percent this year as exports languish. Last month it forecast that exports, excluding diamonds and startups, will shrink by 1.1 percent this year.

“Currency appreciation is something that needs to be dealt with via structural measures and quite possibly via the setting up of a sovereign wealth fund,” said Tevfik Aksoy, chief emerging-markets economist at Morgan Stanley in London. Another quarter-point cut won’t make “a material impact,” he added.

The shekel’s 11 percent rise against the dollar in the past 12 months has made it the best performer among the 31 major global currencies Bloomberg tracks.

The shekel gained 0.2 percent following the decision, and was trading at 3.523 to the dollar at 6:38 p.m. in Tel Aviv. One-year interest rate swaps rose to 0.94 percent, up from 0.91 percent before the decision. Two-year swaps rose to 1.13 percent from 1.12 percent.

Maneuvering Room

With inflation at 1.3 percent, the low end of the 1 percent to 3 percent target range, the central bank has room to lower borrowing costs further. That would risk fueling housing prices, which soared 72 percent between 2007 and 2012, according to the Central Bureau of Statistics in Jerusalem.

“You can’t really say that indicators have improved since the last decision,” Katz said, citing “poor” industrial production and industrial export figures and a decline in raw material imports. Other countries, such as Chile, are also cutting rates, he said.

“The question is if a rate cut will be effective in preventing shekel appreciation, and is it maybe causing a bubble to develop in the housing market,” Katz said. “When you look for and against, I’m not sure a rate cut will improve the situation.”

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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