Bank of Israel Holds Lending Rate, Resisting Pressure to Cut

  • All 21 economists surveyed by Bloomberg predicted the decision
  • BOI concludes this is not the time for unconventional steps

The Bank of Israel left its benchmark interest rate near zero, concluding that unconventional action isn’t warranted to weaken the export-battering shekel and spur inflation after 17 months of price drops.

In holding borrowing costs at 0.1 percent on Monday, the central bank resisted the more aggressive measures adopted by a growing number of central banks, most recently Japan, which have cut rates below zero to deal with similar problems: tepid growth and sluggish inflation. All 21 economists surveyed by Bloomberg predicted the bank would hold the rate, with some noting that low inflation is temporary due to transitory events such as dropping oil prices.

Home prices rose 8 percent in the past year, and the volume of mortgages remains high, the central bank said in a statement accompanying its decision. Economic indicators suggest growth is similar to previous years, employment levels are high, and wages continue to increase, it said.

At the same time, global economic activity has moderated, and risks to growth and the central bank’s 1 percent to 3 percent target range “remain high,” it said.

Drawbacks

“There has been some talk of negative rates but I think the central bank is wise to hold because it understands the drawbacks would outweigh the benefits,” said Ofer Klein, head of economics and research at Harel Insurance & Financial Services Ltd. “Negative inflation is coming from external events outside the central bank’s control, namely a drop in commodities prices and government regulation. So why should the bank risk pushing up housing prices, which are already quite high?”

Traders have recently increased bets that a cut is possible. Shekel forward-rate agreements for the next three, six and nine months, together with one-year interest rate swaps, have all dropped below Israel’s record-low benchmark rate.

“The Bank of Israel is running out of options and tools, so the market is pricing in a possibility that the central bank may lower borrowing costs,” said Gil Chen, head of the fixed-income desk at Israel Brokerage & Investments Ltd. in Tel Aviv. “The pressure on the central bank to act unconventionally will come from abroad with reduced bets of U.S. rate increases this year and more global central banks cutting interest rates to negative territory.”

Israeli growth has been hurt by the decline of exports on weaker global demand and the shekel’s strength. Negative inflation has deepened, meanwhile, with inflation expectations for two years forward dropping to 0.1 percent in February.

“Medium- and long-term expectations are anchored within the target range,” the central bank said. “Further initiated price reductions are expected to be reflected in the next few CPI readings as well. In contrast, wage increases in the economy are expected to support a return of the inflation rate to within the target range.”

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