Bank of Israel Holds Rate as It Raises Growth Outlook

  • All 19 economists surveyed by Bloomberg predicted the decision
  • Economists expect central bank’s next move to be rate rise

The Bank of Israel held its interest rate at a record low as the economy picked up steam, and raised its economic growth forecasts for this year and next.

The central bank’s monetary policy committee left its benchmark interest rate at 0.1 percent for a 20th month, as predicted by all 19 economists surveyed by Bloomberg. The bank’s research department forecast that growth will accelerate this year to 2.8 percent, up from its June outlook of 2.4 percent. Next year the economy will grow 3.1 percent, up from the previous projection of 2.9 percent, it said.

With key economic indicators showing improvement, economists generally expect the central bank’s next move will be a rate increase -- but only after the U.S. raises its borrowing costs again. The bank’s research department predicted the interest rate will start rising again toward the end of next year.

No Rush

After output grew a faster-than-expected 4 percent in the second quarter, the economy looks ripe for higher rates -- but there’s no hurry. Inflation in Israel has been negative for 24 consecutive months, due to one-time government measures rather than falling demand, allowing the Bank of Israel to hold tight for U.S. rate rises.

“The interest rate won’t go up for a long time, not only because of the moderate inflationary environment, but also because the expansionary policy worldwide isn’t expected to change,” said Idan Azoulay, head of the mutual funds department at Epsilon Investment House Ltd.

The shekel stayed higher after the rate announcement. Strengthening 0.3 percent to 3.7527 per dollar, it was set for the highest close since May 2 at 4:46 p.m. in Tel Aviv. The yield on the government’s benchmark bonds maturing October 2026 was down one basis point to 1.71 percent.

The shekel is trading at an all-time high versus a basket of currencies, driving down profits for exporters, which form the backbone of the economy. The Bank of Israel, which last year cut borrowing costs to a record low, hasn’t eased further for fear that might encourage more home-buying in an already overheated mortgage market without necessarily stimulating growth.

“The committee does not see a need to use additional policy instruments at this stage,” Governor Karnit Flug said at a news conference. “All these remain available to the committee should it see a need for them.”

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