- All 19 economists surveyed by Bloomberg predicted the decision
- Israel central bank charts middle course between Fed, ECB
The Bank of Israel left its benchmark interest rate near zero for a 10th month and predicted monetary policy will remain expansionary for some time. It cut the economic growth forecast for next year by half a percentage point.
The decision on Monday to keep the rate at 0.1 percent charted a middle course between the Federal Reserve’s decision to raise rates for the first time in almost a decade and the European Central Bank’s decision to extend monetary stimulus. All 19 economists surveyed by Bloomberg had predicted the rate wouldn’t change, putting the bank at odds with Finance Minister Moshe Kahlon’s talk of raising borrowing costs after the Fed liftoff.
“The Monetary Committee assesses that monetary policy will remain accommodative for a considerable time,” the four-member panel, led by Governor Karnit Flug, said in a release, citing developments in the inflation environment, global and domestic growth, the exchange rate, and monetary polices of major central banks. The shekel was little changed at 3.8783 to the dollar.
The bank’s research department, in a separate macroeconomic forecast, predicted the interest rate would rise to 0.25 percent by the end of next year. It lowered its growth forecast for 2016 to 2.8 percent from 3.3 percent, and for this year to 2.4 percent from 2.6 percent.
The Federal Reserve raised rates for the first time since 2006 on Dec. 16, setting a new target range of 0.25 percent to 0.5 percent. Earlier in the month, the European Central Bank cut its deposit rate to -0.3 percent and announced it would extend its quantitative easing program until at least March 2017. Conflicting U.S. and European policies present the Israeli economy with challenges, Flug said at a news briefing.
“While the federal funds rate increase and the entrenchment of growth in the U.S. will help exporters to that bloc, the accommodative policy in Europe is expected to weigh on exporters to the euro bloc.” she said. “The conduct of monetary policy will need to take into account the range of effects of developments in the major economies on exchange rates, inflation, real activity, and financial markets.”
The bank’s research department estimated 2015 inflation at -0.8 percent and 2016 inflation at 0.6 percent, both below the government’s target band of 1 percent to 3 percent. Exports, excluding diamonds and startups, will decline 2 percent this year, the forecast said.
The Israeli shekel is second-strongest against the dollar this year among 31 expanded majors tracked by Bloomberg. The Israeli currency has gained about 0.3 percent against the dollar this year, more than 10 percent against the euro and about 7 percent against the basket of currencies the Bank of Israel sets.
The chief economist at Bank Leumi Le-Israel Ltd., Israel’s second-largest bank in assets, predicted the central bank won’t raise borrowing costs until mid-2016 to take advantage of the rate gap with the U.S.
“It would be good for exporters in terms of export competitiveness,” Bufman said on Thursday. “Also, a little bit of it would trickle through to inflation and help to get back to the inflation target range a bit quicker.”
While Israeli consumer prices dropped for a 15th month in November, falling 0.9 percent on an annual basis, the central bank won’t cut rates further to try to bring inflation back to the target range, he predicted.
“The Bank of Israel has been stressing the transitory, the one-off factor in the move to negative inflation,” Bufman said. “At the same time, they have pointing to inflation expectations for the medium and long term, 5 years ahead, 10 years ahead, and saying: they’re well anchored in the price stability range.”