Bank of Israel’s Flug Says Interest Rate Could Go Negative

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Karnit Flug
Karnit Flug, governor of the Bank of Israel. Photographer: Ariel Jerozolimski/Bloomberg

The Bank of Israel may cut its benchmark interest rate below zero if circumstances warrant, Governor Karnit Flug said Tuesday.

“There are countries today with negative interest rates, and under certain conditions we can also get there,” Flug said on Israel’s Channel 2 television.

The bank’s policy committee, led by Flug, held the rate at 0.1 percent Monday, while warning that risks to the economy and prices have increased. In June, the bank forecast economic growth at 3 percent this year and 3.7 percent in 2016.

It’s too soon to determine the full impact of global stock market fluctuations over the past few days, Flug said. Low interest rates are already helping to maintain growth, she said.

“In a period in which the situation is still unclear,” it’s best to pause and take stock before acting, she said.

Aside from negative interest rates, “there are lots more tools” in central bank toolkits, Nathan Sussman, the central bank’s research director, said in an Israel Radio interview on Tuesday. He cited foreign currency purchases as an example.

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.

Deficit Criticized

The bank said in its statement on the rate decision that “the monetary committee is of the opinion that the risks to attaining the inflation target, and to growth, have increased.”

The shekel weakened 0.1 percent to 3.8688 per dollar at 9:33 a.m. in Tel Aviv on Wednesday.

Flug criticized the government for setting the 2016 budget deficit target at 2.9 percent of gross domestic product, after the bank had recommended it not exceed 2.5 percent.

“It is no secret I think the government budget deficit is too high,” she said.

That wide of a gap will limit the government’s room to maneuver in the face of circumstances such as the recent market fluctuations, Flug said.

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