Bank of Israel Leaves Benchmark Rate Unchanged at Record Low

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The Bank of Israel left its interest rate unchanged after cutting the benchmark to a record two months ago, amid expectations prices will start rising again.

The five-member monetary panel, led by Governor Karnit Flug, kept the policy rate at 0.1 percent on Monday. Eighteen of 22 economists surveyed by Bloomberg had forecast the decision, while the remainder had predicted a cut. The weakening of the shekel since the last rate cut and expectations that inflation, now negative, will return to the government’s target range allowed the bank to defer any action.

The bank noted in its decision that consumer prices rose 0.3 percent in March -- the first month-on-month increase since October -- and that homebuying costs continue to rise. Indicators of economic activity for the first quarter point to moderate growth, it said.

“The monetary committee chose to wait for additional data before taking the extreme step of reducing the interest rate to zero, because the macroeconomic variables that were published recently, including the State of the Economy index, don’t support a rate cut,” Ayelet Nir, chief economist at Yetzirot Investment House in Givatayim, said in an e-mailed statement.

The shekel strengthened by as much as 0.5 percent following the announcement. It was trading at 3.8980 against the dollar at 6 p.m. The benchmark TA-25 Index declined 0.2 percent.

Recouped Losses

The shekel slid 3 percent against a basket of currencies in the days after the last rate cut and has since recouped most of that decline. While noting reasons for not cutting the rate, the bank at the same time cited concern about the potential for added shekel strength.

“A decline in the projected rate of world trade growth and continued appreciation are liable to weigh on growth of exports and of the tradable sector,” the bank said.

The decision to hold the rate belies the bank’s pessimistic tone, said Nira Shamir, chief economist at Israel Discount Bank Ltd.

“This is what worries the Bank of Israel the most: the exports, and the strong shekel,” Shamir said. Going forward, the bank may cut the rate or employ quantitative easing by buying foreign currency, she said.

The Manufacturers Association of Israel urged the bank to use tools at its disposal to influence the exchange rate, including quantitative easing, currency purchases and negative interest rates.

‘Courageous’ Policy

“I rely on the Bank of Israel governor to continue her courageous and responsible policy of restraining the shekel’s appreciation against the basket of currencies, and take the steps needed to protect exports and the economy’s competitive edge,” Shraga Brosh, president of the industrialists’ group, said in an e-mailed statement. The shekel has gained about 11 percent against the euro since the beginning of the year, hurting exporters who trade with Israel’s main commercial partner, the European Union.

Alex Zabezhinsky, the chief economist at Meitav Dash Investments Ltd. in Tel Aviv, said despite the hints about possible expansion, “we think the chance of this is very low, due to the many risks associated with it” he said. Falling borrowing costs have been instrumental in the doubling of housing prices over the past eight years.

The central bank has reduced its benchmark rate 13 times since 2011 to weaken the shekel and shore up exports, which account for about a third of Israel’s $290 billion economy. Last year, the economy expanded 2.8 percent, its slowest annual pace in five years, and it’s forecast by the bank to grow 3.2 percent in 2015.

‘No Point’

“There’s no point lowering the interest rate again and wasting such precious monetary ammunition,” Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv, said before the announcement. “If the shekel starts to strengthen again in the coming weeks, then the Bank of Israel certainly might cut the rate.”

While annual consumer prices dropped for a seventh month in March, by 1 percent, inflation expectations rose to the lower limit of the government’s 1 percent to 3 percent target range in March and to 1.1 percent in April. Unemployment fell in February to 5.3 percent, the lowest since at least 2012.

The Bank of Israel reported Monday that its State of the Economy indicator rose a preliminary 0.4 percent in March, “slightly higher” than the average growth rate in the past year.

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