The Bank of Israel left its interest rate unchanged at a record low, amid expectations negative inflation will reverse course.
The five-member monetary panel, led by Governor Karnit Flug, kept the benchmark rate at 0.1 percent on Monday. Seventeen of 22 economists surveyed by Bloomberg had forecast the decision, while the remainder predicted a cut. The shekel strengthened.
The bank cited a cumulative increase of 0.9 percent in the consumer price index in March and April after months of negative readings. Israel’s consumer price index is projected to rise to the lower bound of the government’s 1 percent to 3 percent target range over the next 12 months, the Bank of Israel said in its statement announcing the rate decision.
While the index was down 0.5 percent in April from a year earlier, its eighth consecutive monthly decline, the drop was less than in the previous two months.
The “slightly firmer headline CPI print in April” offered “an excuse for the central bank to postpone further easing, for now,” Goldman Sachs analyst Kasper Lund-Jensen said by e-mail before the rate decision.
The rate’s path 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 its statement.
Some analysts, including Lund-Jensen, say Flug will eventually cut rates to zero to spur inflation and weaken a strong shekel that is hurting exports. Idan Azoulay, chief investment manager at Epsilon Investment House Ltd. in Tel Aviv, says he doesn’t see that happening soon.
“Another rate reduction is liable to lead to continued increases in the price of housing and other financial assets,” Azoulay said in an e-mailed statement. “In this context, I find it difficult to see the interest rate falling in the next few months, either.”
The shekel gained 0.6 percent to 3.8640 to the dollar in Tel Aviv immediately after the rate announcement.
Looking to Fed
Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv, predicted Flug would wait to see what the Federal Reserve does before changing course. “Until then, the bank will try to maintain the current interest level and will be forced to cut only if the shekel significantly appreciates versus the currency basket,” Greenfeld said in an e-mail.
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 $280 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.
Unemployment fell to 4.9 percent in April from 5.2 percent in March, the Central Bureau of Statistics said Monday, the lowest since the government recalculated how it measures the jobless rate in early 2012.