Israel Rates Can Go Lower, Central Bank’s Deputy Chief Says

The Bank of Israel’s latest surprise rate cut may not be the last in the current cycle, deputy governor Nadine Baudot-Trajtenberg said.

The bank trimmed the policy rate to 0.5 percent on July 28, matching the low it reached during the slump of 2009. “At this point we don’t feel that there is a need to do more than that,” Baudot-Trajtenberg said in a telephone interview yesterday. “But in principle there is still more room, particularly given that inflation is so low.”

The shekel declined after her comments, falling 0.1 percent to 3.4322 per dollar at 10 p.m. in Tel Aviv. The currency has surged about 15 percent over the past two years, and capping it has been a key Bank of Israel goal.

Risks for Israel’s economy include the three-week conflict in Gaza, which threatens the tourism industry. Consumer spending has also declined, and the shekel’s strength is squeezing exporters, who are urging Governor Karnit Flug to cut rates to zero and take additional steps to rein in the currency.

The Gaza war was “an additional factor” in the decision to cut rates, and the main focus was on the broader economy, Baudot-Trajtenberg said. Data suggest that output “is not going to pick up in the next few months,” she said.

The global economic slowdown of the past six years pushed the Federal Reserve and other central banks into alternative stimulus policies as their benchmark rates neared zero. Flug’s latest cut has led some economists to predict that the Bank of Israel may follow suit.

Shekel Floor

The bank is looking at “everything that exists in the tools of monetary policy” to help the Israeli economy weather the malaise in world trade and address the shekel’s strength, Baudot-Trajtenberg said.

She didn’t rule out the possibility of setting a floor for the currency, a step backed by Israel’s biggest manufacturing group, though she said nations that have taken such measures are in different situations.

The Czech Republic is among the countries whose central banks have weakened their currencies by announcing a target level.

“They had domestic deflation for a relatively long period of time,” Baudot-Trajtenberg said. “We aren’t quite in the situation of the countries that have taken those steps, but as they say -- policymakers always say, never say never.”

Rafi Melnick, another Bank of Israel policy maker, said in a May interview that a shekel floor wasn’t under consideration.

‘Main Concern’

Israel’s inflation rate fell to 0.5 percent last month, below the government’s 1 percent to 3 percent target range for the first time since May 2013.

While some economists have suggested that the Bank of Israel may begin bond purchases, Baudot-Trajtenberg said that quantitative easing is generally used when the biggest concern is a lack of lending by domestic institutions.

“For the moment, this is not the area we have identified as our main concern, but things can change and tools need to change” to match circumstances, she said.

For the monetary policy committee to cut the benchmark further, it would have to see a weakening of the economic environment or signs of a further slowdown in inflation, she said.

“There is room to cut further,” said Rafi Gozlan, chief economist at Israel Brokerage & Investments - IBI Ltd. He predicted the move won’t come for “a number of months yet,” and said the bank’s message is designed to “impact on the shekel in an elegant way.”

‘Extraordinarily Open’

Baudot-Trajtenberg joined the central bank as deputy governor in March. Born in Montreal, she holds a PhD in economics from Harvard University, and served as chief economist and head of investor relations at Bank Hapoalim Ltd. She also held the post of associate dean of the School of Economics at Interdisciplinary Center Herzliya.

Baudot-Trajtenberg said that Flug, who took over from Stanley Fischer last year after two other government nominees pulled out, keeps an open mind during monetary policy meetings. “What is characteristic of the present governor is flexibility of thought,” she said. “Discussions are extraordinarily open and honest.”

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