Bank of Israel Keeps Rate Unchanged at 1.25%

The Bank of Israel kept the benchmark lending rate unchanged for the third time after quarterly growth surged and amid signs a global recovery is strengthening.

The five-member monetary policy panel, which has been led by acting Governor Karnit Flug since Stanley Fischer stepped down two months ago, left borrowing costs unchanged at 1.25 percent. All 22 economists surveyed by Bloomberg had forecast the decision.

“The global picture indicates slow improvement in advanced economies,” the bank said in a statement. In Israel, “expectations of future economic activity are consistent with continued moderate growth at a rate similar to that of the recent period.”

Growth jumped to 5.1 percent in the second quarter, compared with a 3 percent median estimate of eight economists surveyed by Bloomberg. In the U.S., jobless claims fell to a five-year low while in Europe, factories and services companies’ output improved. In China, manufacturing resumed expansion in August, after shrinking in July.

The growth rate and a weaker shekel “gave the bank an excuse to avoid a rate cut, even though it seems the real reason is the absence of a new governor,” said Shmuel Ben Arie, head of shekel wealth management at Pioneer Private Wealth Planning in Herzliya.

The dollar remains weak against the shekel, he added, and “if it continues to weaken, hurting the economy, the next central bank governor will have to lower the rate.”

Shekel Depreciated

The shekel was headed for the weakest level in almost seven weeks after the rate cut, depreciating 0.5 percent to 3.6064 a dollar at 5:36 p.m. in Tel Aviv. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell six basis points to 1.25 percent.

The Bank of Israel under Fischer lowered the benchmark rate twice in May to help spur growth in the export-driven economy, completing a 2 percentage point cut since 2011. The central bank has held the rate at 1.25 percent since, the lowest level since 2010.

Monetary panel member Reuben Gronau said Aug. 5 he would “have to be convinced” that an additional rate cut would help the economy. He added that others on the committee might think differently.

Together with the rate cuts in May, the Bank of Israel announced a plan to buy $2.1 billion by the end of the year in an effort to help moderate the shekel gain. The Israeli currency strengthened by about 3.3 percent in the past six months, making it the best performer during that period among the 31 major currencies tracked by Bloomberg.

Inflation quickened to 2.2 percent in July, above the midpoint of the government’s 1 percent to 3 percent target for the first time since September 2012. It is expected to slow to to 1.9 percent in the coming 12 months, according to the average of forecasts in a central bank survey released Aug 19.

Economic growth is forecast to slow to 3.2 percent in 2014 from 3.8 percent this year, the central bank said on June 24.

New Governor

The government has not yet approved a central bank chief to replace Fischer, who left at the end of June after eight years at its helm. Two nominees withdrew during the government vetting process. Three more candidates are currently being considered: Mario Blejer, a former Argentina central banker; Zvi Eckstein, a former Bank of Israel deputy governor; and Victor Medina, a onetime Finance Ministry director general and former chief executive officer of United Mizrahi Bank Ltd.

The bank also today said it would return to monthly interest rate decisions, instead of 10, reversing a decision not to meet around major Jewish holidays.

“The Committee was of the opinion that under current circumstances, it is optimal to maintain the flexibility that comes with monthly monetary discussions on interest rate decisions, and resolved to return to a format of reaching interest rate decisions 12 times per year,” the bank said in a statement.

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