Flug Says Unconventional Steps on Table as Israel Rate Held

Israel’s central bank won’t hesitate to take additional monetary policy steps if needed to boost growth and bring inflation back to target, Governor Karnit Flug said after holding the benchmark interest rate at a record low.

“Regarding the question about unconventional tools: as I stated just now, the state of the economy both in terms of inflation and data on economic activity is less good and the steps are certainly on the table,” Flug told a news conference in Jerusalem.

“If we think there is a need, we will certainly use those steps or others,” she said. The central bank kept its base rate at 0.1 percent earlier on Thursday.

The bank has cut the nation’s key lending rate 13 times since 2011 as it battled a strong shekel that’s weighing on exports as well as slowing economic growth and inflation. It has also purchased foreign currency, buying about $6 billion from January through August, according to Bank Leumi Le-Israel Ltd.

“The current interest rate level is such that the bar for a cut is very high,” Ori Greenfeld, chief economist at Tel Aviv-based Psagot Investment House Ltd., said in an e-mail. “Any further rate cut will be considered unconventional monetary policy, and therefore, in order to convince the Bank of Israel to cut the interest, it will be necessary to see significant deterioration in real economic data.”

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The shekel strengthened 0.5 percent, the sharpest appreciation since Sept. 16, and was trading at 3.9277 per dollar in Tel Aviv at 5:47 p.m. local time. In the year to date, the Israeli currency has been the fourth-best performer among 31 major peers tracked by Bloomberg.

The TA-25 index of shares declined 3.5 percent to 1,524.08, its lowest level since Feb. 26.

Also Thursday, the Finance Ministry announced a plan to encourage growth that included funds for small-to-medium businesses and guarantees for exporters of more than $1.1 billion. Exports, which account for about a third of Israel’s $304 billion economy, dropped in the second quarter, when the economy slowed to a near-standstill.

The bank will have to intervene in the currency market in the near future to weaken the shekel, which has impacted on exports, Yossi Fraiman of Prico Group, said after the rate decision was announced.

Inflation, which declined for a 12th month on an annual basis in August, dropped due to one-time factors and will return to the target range of 1 percent to 3 percent at the end of 2016, Flug said.

The yield on government notes due August 2025 fell 6 basis points to 2.17 percent, the lowest since Aug. 31. The one-year swap rate rose by 1 basis point to 0.06 percent after the bank’s research department said it expected the interest rate to remain unchanged until the first quarter of 2016.

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