Below-Zero Interest Rates on the Table

Israel’s short-term interest rates could be cut below zero and other monetary policy tools considered should the shekel strengthen further and threaten the economy’s export-led recovery, Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg said on Thursday.

Following the remarks, the Tel Aviv Stock Exchange (TASE) surged to a record high, and boosted the exchange rates of the shekel against the dollar and euro to NIS 3.94/$ and NIS 4.467/€, respectively.

The central bank unexpectedly lowered its benchmark interest rate to a new all-time low of 0.10 percent from 0.25 percent on Monday, citing the shekel’s appreciation.

The currency, long overvalued against the dollar and euro, had weakened in recent months on the back of slower growth, lower interest rates and a very low inflation outlook. But some of that depreciation had reversed ahead of Monday’s rate cut.

Baudot-Trajtenberg said that while the central bank was “relatively comfortable” with its 2015 growth forecast of 3.2 percent, “we needed to ensure that no further [dollar-shekel] depreciation takes place.”

“We had concern that looking forward, without the extra push, we would not necessarily maintain our growth estimate,” Baudot-Trajtenberg said in an interview with Reuters.

Baudot-Trajtenberg said exports — some 40 percent of Israel’s economic activity — were crucial to growth this year. “Domestic demand is decent but not vigorous and investment is not growing at all,” she said, noting the forecast for global trade was still subdued.

“We did what we thought was needed,” said Baudot-Trajtenberg, who became deputy to Governor Karnit Flug last March.

She said rates could still go down if needed.

“If you look at central banks in many countries, you see them experimenting with negative interest rates, which we had thought was never possible,” she said.

“I don’t think we have completely exhausted the interest rate tool. And we are also considering other tools.”

Further reductions, as well as the use of quantitative easing, depends on how the economy responds, she said. One positive is solid U.S. growth, although Europe, Israel’s largest overall trading partner, is still struggling.

“We are sensitive to both economies and at least one is going in the right direction,” Baudot-Trajtenberg said. “When we need to move will depend on what is happening in these economies.”

Baudot-Trajtenberg downplayed the impact of the latest rate cut on already sizzling housing prices, saying long-term rates mattered more and that “clearly, the solution is an increase in [housing] supply.”

This article appeared in print on page 6 of the February 26th, 2015 edition of Hamodia.