Bank of Israel Holds Interest Rate With Shekel Going Strongby
All 12 economists surveyed by Bloomberg predicted the decision
Bank of Israel on hold as growth improves on consumption
The Bank of Israel kept its benchmark interest rate at a record low amid expectations it won’t begin raising rates until months after the Fed does.
The central bank left its interest rate at 0.1 percent for a 19th month, as predicted by all 12 economists surveyed by Bloomberg. Improving economic indicators, including surprisingly strong second-quarter economic growth of 3.7 percent, mean a rate cut is off the table for now, even as the shekel trades at an all-time high against a basket of currencies.
Before the Bank of Israel raises rates, inflation “needs to be in positive territory,” said Ori Greenfeld, the chief strategist at Tel Aviv-based Psagot Investment House Ltd., which doesn’t expect a rate increase before late 2017. “And the rate gap with the U.S. must be much wider so that the central bank is certain that an increase won’t lead to shekel appreciation.”
The shekel weakened 0.4 percent to 3.7899 per dollar, the lowest level since Aug. 18, at 4:08 p.m. in Tel Aviv. Shekel forward-rate agreements for the next six and nine months, as well as one-year interest rate swaps, have all risen above Israel’s benchmark rate, indicating greater expectations that borrowing costs will increase next year.
The currency’s strength has been a drag on an economy reliant on exporting goods and services.
Bets are up that that the Federal Reserve will raise rates in September after Chair Janet Yellen expressed confidence that tightening labor markets will push up inflation. Israel isn’t expected to increase borrowing costs until the second quarter of 2017, according to the median forecast of six economists surveyed by Bloomberg.
The Bank of Israel, led by Governor Karnit Flug, isn’t rushing to tighten policy for fear that would strengthen the shekel, which she has termed overvalued. Inflation has been negative for 23 straight months, but inflation expectations have been recovering.
The bank, in its rate decision, said it was premature to say whether the second-quarter growth rate would be sustained and that the “risks to achieving the inflation target remain high.” While exports increased at an “adequate rate,” it still lags world trade growth, it said.