Israel May Hold Off on Rate Rise Until Mid-2016, Leumi Says

  • Won't follow Fed right away; rate gap may weaken shekel
  • Negative inflation due to one-off factors; rate cut not needed

The Bank of Israel won’t mirror U.S. Federal Reserve rate moves and probably will wait until mid-2016 to raise borrowing costs for the first time in five years, said the chief economist of Israel’s second-largest bank in assets.

The monetary policy committee, led by Governor Karnit Flug, will try to open up an interest rate differential with the U.S. in a bid to depreciate the shekel, Gil Bufman of Bank Leumi Le-Israel Ltd. said in an interview in his Tel Aviv office. The Israeli currency is the second-strongest against the dollar this year of 31 expanded major currencies tracked by Bloomberg, and Bufman said a weaker shekel could boost growth and might spur inflation after 15 months of price drops.

Gil Bufman

Source: Bank Leumi

“It would be good for exporters in terms of export competitiveness,” Bufman said on Thursday. “Also, a little bit of it would trickle through to inflation and help to get back to the inflation target range a bit quicker.”

The Bank of Israel last week pushed back against Finance Minister Moshe Kahlon’s talk of a need for a rate increase following the Fed liftoff, saying under current circumstances monetary policy must remain “very expansionary.” The central bank left its rate unchanged at 0.1 percent Monday, saying monetary policy would probably remain accommodative for a “considerable time.”

The Federal Reserve raised rates for the first time since 2006 on Dec. 16, setting a new target range of 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Policy makers separately forecast an appropriate rate of 1.375 percent for the end of 2016, implying four quarter-point increases in the target range next year, based on the median projection of 17 officials.

Israel’s shekel has gained about 0.2 percent against the dollar this year and about 7 percent against a basket of currencies set by the Bank of Israel. Exports, excluding diamonds and startups, may decline 2.6 percent this year, the central bank said in its September macroeconomic forecast.

The Bank of Israel reduced its benchmark interest rate to 0.1 percent in March, and has left it unchanged since. While consumer prices have fallen 0.9 percent in the past 12 months, Bufman says he doesn’t see the bank cutting the rate further in a bid to bring inflation rises within the government’s target range of 1 percent to 3 percent.

“All the negative inflation figures that we have been seeing in the monthly and yearly inflation numbers are transitory and are due to a lot of one-offs,” Bufman said. “As these clear out, the inflation outlook is likely to rise.”

Prices have dropped in part because of lower global fuel and commodity prices, and government measures including a value-added tax cut.

Bufman is expecting more transitory influences in the coming months, including lower public transportation and car insurance rates. At the same time, the Bank of Israel is emphasizing that medium- and long-term inflation expectations of 5- to 10 years are within the target range, he said.

“Short-term inflation developments which are based on all kinds of one-offs can’t be affected by monetary policy,” Bufman said. “If the medium- and long-term environment as shown in inflation expectations are anchored in the target range, they don’t have to make any moves.”

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