Bank of Israel Holds Interest Rates Unchanged

The Bank of Israel is anticipated to hold short-term interest rates unmoved again this week, according to a survey conducted by a news agency, in what would be one of Governor Karnit Flug’s last rate decisions.

There were 13 economists polled ahead of the decision.  All of them said that the central bank would stay on its benchmark rate at 0.1 percent, which has been where it stood since February of 2015.

In an unexpected statement last Friday, the Bank of Israel announced that Flug would not run for a second five-year term when she steps down from her tenure in November.  This means that Flug will lead only two more meetings after Monday.  The last two meetings for Flug are to be held in August and October.

That also increases monetary uncertainty over a 15 basis point rate increase during the fourth quarter that is at present expected by the central bank’s in-house economists.

For 2019, the bank predicts one quarter-point increase to 0.5 percent.

Coming with the monetary rates announcement, the bank will update its macro forecasts, and Flug is set to hold her quarterly news conference later in the day.

Leader Capital Markets chief economist Jonathan Katz said that he believes that even though there’s a rising inflation expectation, the central bank will wind down its rate increase in early 2019.

“It’s too early to hike,” he said, giving attention to the claim that the shekel is strong at a 3.63 rate per dollar.  “Any message that they will keep a rate hike in the fourth quarter and if they add a hike in 2019 that will cause a ripple” he said, adding that the ripple will push the shekel higher.

Flug and other central bank officials have often said that there would not be a hike until inflation is entrenched in the government’s annual target, which is currently resting at 1 to 3 percent.

Nira Shamir, who is the chief economist at Israel Discount Bank, stated that policymakers may have failed to reach a window of opportunity to establish a process of rate hikes.

Shamir said that the central bank “should aspire to as many rate hikes as possible already in 2019.”  She also predicted a rate increase to 0.25 percent for the fourth quarter and three more quarter-point hikes next year to hit 1 percent.

“In the past two days we have seen a rise in government bond yields… and it is reasonable to assume that the Bank of Israel will update its interest rate forecast,” she added.

Meanwhile, Israel’s economy remains strong.  It has grown an annualized 4.5 percent in the first quarter.  Growth is seen at around 3.5 percent in 2018.

Since the latest decision on May 28, the shekel has slumped to 3.63 per dollar from 3.57, being 4 percent lower for this year.

Finance Minister Moshe Kahlon stated earlier this year that he would start searching for candidates for governor.  He also said that Flug would be considered.  Flug, who has replaced previous governor Stanley Fischer in 2013 after serving as Fischer’s deputy, and Kahlon have had disagreements over Kahlon’s housing and tax policies.

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