Bank of Israel Leaves Interest Rate Unchanged

TEL AVIV (Reuters/Bloomberg) -

The Bank of Israel left its benchmark interest rate at 1.0 percent for a fourth straight month, pointing to moderate growth, labor market weakness and a strong shekel.

The move, which was expected, came as data this month showed the economy continued to grow at modest rate with some improvement in the fourth quarter versus the prior three months.

Exports, a main growth driver that accounted for about one-third of Israel’s economic activity in 2013, edged down 0.1 percent last year according to government data.

“The picture in the fourth quarter regarding exports is better than it was in the third quarter, but there was some moderation again in December,” the central bank said in its rates decision on Monday.

“Over the longer term there has essentially been a standstill in exports, against the background of moderate growth of world trade and the appreciation of the shekel.

“The unemployment rate continued to decline and is at a low level, though various indicators, such as job vacancies and health tax receipts, indicate some labor market weakness,” it added.

Israel’s economy grew an estimated 3.3 percent in 2013 and is forecast to grow at a similar pace this year.

The shekel has hovered around the 3.50 per dollar level for the past two months and sits at a 2-1/2 year high versus the U.S. currency. The central bank has been buying dollars to contain gains in the shekel, since a strong currency harms Israel’s export-dependent economy.

It noted that since the last decision a month ago, the shekel had appreciated 1 percent versus the dollar while the greenback gained against most major global currencies.

Eldad Tamir, chief executive of the Tamir Fishman investment house, said that lowering interest rates has proven ineffective in weakening the shekel while it leads to higher mortgage transactions.

“It appears that the Bank of Israel has thrown in the white towel in the global war on weakening domestic currencies,” he said. “It’s a pity because the strong shekel continues to hurt the Israeli economy.”

The decision came a day after Former Finance Minister Yuval Steinitz joined the national debate over how to rein in the shekel, in an interview with Bloomberg.

The Bank of Israel should consider cutting borrowing costs to weaken the shekel and stimulate exports, suggested Steinitz, who now serves as minister of intelligence and strategic affairs.

“I would consider having the Bank of Israel reduce the interest rate. That would help weaken the shekel,” which would mean “less foreign currency flows into the country.”

“This is the time to do it,” Yossi Fraiman, chief executive officer at Prico Group and Forex Capital Markets LLC, said in a telephone interview. “The economy is treading water, exports are suffering badly from the exchange rate, and this is an opportunity for the Bank of Israel to do something.”

The Manufacturers Association of Israel complained that the strong shekel is bringing exporters “to the breaking point,” and warned of catastrophic results if effective action is not soon taken, in a statement last week.

“The Bank of Israel governor is inattentive to our needs and says the dollar exchange rate won’t affect all exporters,” association director Amir Hayek said in the statement. “The governor is wrong.”