Bank of Israel Leaves Rate Unchanged at Record Low 0.1%

  • All 20 economists surveyed by Bloomberg predicted a rate hold
  • Bank has decided it won't `flirt' with negative rates: analyst

The Bank of Israel left its interest rate near zero for a ninth month amid signs that economic growth is rebounding from a slowdown earlier this year.

The central bank reiterated that monetary policy will remain accommodative for a considerable time even while noting expectations have firmed that the U.S. Federal Reserves will raise borrowing costs next month. The monetary policy panel, led by Governor Karnit Flug, kept the rate at 0.1 percent on Monday. All 20 economists surveyed by Bloomberg had forecast a hold.

Flug said in an interview on Oct. 29 that only “unusual circumstances” could prompt the central bank to cut the rate beyond its current record low. The Central Bureau of Statistics said on Nov. 16 that economic growth accelerated to 2.5 percent in the third quarter, from 0.2 percent in the previous three months.

“The first estimate of third-quarter growth data indicates a return to the rate of growth that prevailed in the past two years,” the central bank said. A recent wave of violence has until now had a “moderate” effect on growth, it said.

The Bank of Israel’s ‘S’ index of economic indicators on Sunday also showed the economic recovery continuing into the fourth quarter. The index rose to 0.29 percent in October from 0.13 the previous month, primarily due to higher imports of consumer goods and manufacturing inputs. Bank Hapoalim Ltd.’s purchasing managers index also points to an expansion in industrial activity in October following a contraction the previous month.

“The bank of Israel has apparently decided not to flirt with negative interest rates,” Daniel Hewitt, a senior emerging-markets economist at Barclays Plc in London, said before the announcement. “Although growth is not great, it’s not bad, and most countries would be very happy in this global environment with growth between 2 percent to 3 percent.”

Inflation Worry

One area of concern for the central bank remains consumer prices, which declined for a 14th month on an annual basis in October by 0.7 percent. The bank’s inflation target range is 1 percent to 3 percent.

“The bank’s view is that, while inflation is below target, it’s not a monetary phenomenon, it’s because of lower world energy prices and Israeli government policies aimed at reducing the cost of living,” Hewitt said.

The central bank has reduced its benchmark rate 13 times since 2011 , most recently in late February, to weaken the shekel and shore up exports, which account for about a third of Israel’s economy. Interest rate cuts have also contributed to the doubling of housing prices since 2007.

“Looking ahead, our baseline expectation is that the BOI will refrain from implementing any additional easing measures in 2016, as we anticipate that activity and inflation will improve slowly,” Goldman Sachs said in an e-mailed note ahead of the rate decision. “Given potential financial stability risks in the housing markets, we believe the central bank is hoping that it simply can sit-back” and wait for the U.S. Federal Reserve to raise interest rates, strengthening the dollar against the shekel.

Most economists in a Bloomberg survey and traders of federal funds futures expect the Fed will raise the bank’s key lending rate from near-zero, where it has been since 2008, at their next policy-setting meeting in mid-December.

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