May 26 (Bloomberg) -- The Bank of Israel kept the benchmark lending rate unchanged for a third month, defying market expectations for a reduction, after unemployment declined to its lowest in five months. The shekel strengthened.
The six-member monetary policy panel, led by Governor Karnit Flug, held the borrowing cost at 0.75 percent. Eleven of the 21 economists surveyed by Bloomberg had forecast a cut, while the remainder expected no change.
“Labor market data continue to indicate growth in employment and reduced unemployment, and there was improvement in indices of consumer confidence and of expectations of activity,” the Bank of Israel said in its decision.
In April, the jobless rate declined to 5.6 percent, the third consecutive monthly drop, the Central Bureau of Statistics in Jerusalem reported today. The Purchasing Manager’s Index rose to 51.4, with a measure above 50 indicating economic expansion.
“The positive employment data released today, which was probably known to the heads of the Bank of Israel ahead of time, prevented the Bank of Israel from taking a risk and reducing the interest rate,” said Moshe Shalom, director of research at FXCM Israel, a currency brokerage.
Market players who had expected a cut pointed to signs of a slowing economy.
Economic growth declined to 2.1 percent in the first quarter from 2.9 percent in the previous three months, and according to a central bank forecast in March, will decelerate to 3.1 percent this year from 3.3 percent in 2013. Annual inflation unexpectedly slowed in April to 1 percent, the lower limit of the government’s target band.
The shekel gained 0.3 percent against the dollar after the rate decision, and was trading at 3.4768 at 5:01 p.m. One-year interest rate swaps jumped to 60 percent, up from 57 percent before the decision.
The Bank of Israel has reduced the benchmark interest rate 10 times since 2011 and purchased about $9 billion in the past year to help weaken the shekel and boost the $273 billion economy, which derives a third of its growth from exports. Even so, the currency has gained by about 6.5 percent against the dollar in the past year, the fourth-best performer among 31 expanded majors tracked by Bloomberg.
While the Bank of Israel’s commentary on its rate decision delineated reasons for a reduction, the central bank decided to hold off in part “to keep some ammunition in its arsenal in the event economic data continue to deteriorate and the fear of a recession turns into an actual recession,” said Shmuel Ben Arie, head of shekel wealth management at Pioneer Private Wealth Planning in Herzliya.
A low interest rate is imperative to spur consumption, even though cheaper borrowing costs so far have primarily encouraged mortgage-taking, Ben Arie added. “It appears that the low interest rate environment will be with us for the coming period and there is no fear of a rate rise in the coming quarter.”
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