Bank of Israel Holds Rate at Record Low Amid Growth Warning

Updated on

The Bank of Israel left its benchmark rate unchanged while warning that risks to growth have increased.

The five-member monetary panel, led by Governor Karnit Flug, held the rate at 0.1 percent on Monday. Sixteen of 18 economists surveyed by Bloomberg had forecast no change, while two predicted a cut.

“The Monetary Committee is of the opinion that the risks to attaining the inflation target, and to growth, have increased,” the bank said in its decision.

In June, the bank forecast growth at 3 percent in 2015, and 3.7 percent in 2016. Inflation expectations derived from a Bank of Israel survey of economists declined to 0.7 percent this month, below the government’s 1 percent to 3 percent annual target range.

The central bank maintained its policy rate, in place since March, amid concerns the slowdown in China is worse than thought. More than $5 trillion have been erased from the value of global equities since China, the world’s second-largest economy, unexpectedly devalued the yuan on Aug. 11.

Ori Greenfeld, chief economist at Psagot Investment House Ltd., said the central bank appeared to be “laying the groundwork for further monetary easing” if risks to economic growth do materialize. While critics said the Bank of Israel should have cut in response to the turmoil in the world economy, Greenfeld said those considerations shouldn’t dictate the rate.

“While markets are declining sharply, and there is a real concern that a crisis will develop in some of the emerging markets, the Bank of Israel’s rate decisions can’t and shouldn’t be based on developments in those markets, but on expectations for domestic economic activity,” he said in a statement after the announcement.

Unemployment Low

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 economy. The shekel had lost almost 3 percent against the dollar in the past 10 days, before the decision was announced. Afterward it gained about 0.9 percent.

The bank noted in its decision that unemployment, which was 5.3 percent in July, is low while the job vacancy rate is relatively high. Activity remains robust in the housing market, it noted, with sales of new homes up and prices rising faster in the past month.

If interest rates had been higher, the Bank of Israel might have lowered borrowing costs, Alex Zabezhinsky, chief economist at Meitav Dash Investment House Ltd., said before the announcement.

But it’s “reached the conclusion that continuing the rate cuts to a negative level may increase the risks without any clear gains in terms of higher inflation or strengthening growth,” Zabezhinsky said.

Inherent Risks

The Bank of Israel said last month that low interest rates over an extended period present risks to the domestic financial system, which may materialize if rates increase and destabilize markets.

Home prices have almost doubled since 2007, fueled by the low lending costs. Finance Minister Moshe Kahlon, who ran for election promising to cut housing costs, has taken steps to address both supply and demand, including new taxes on investment property and discounted land prices.

Eldad Tamir, chief executive officer of Tel Aviv-based Tamir Fishman Group, accused the central bank of poor judgment.

“The Bank of Israel decision to leave the rate unchanged is a bad mistake and throws the Israeli economy into the global whirlwind without any tools or any safety net,” said Tamir, whose company manages $5 billion in assets. “In a world in which central banks are supporting their local economies, this inaction is a step of unnecessary weakness.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE