The Bank of Israel kept its benchmark interest rate at 0.1 percent for a tenth straight month on Monday and predicted slower growth in 2015 and next year as the global economy struggles.
Karnit Flug, the central bank’s governor, said there was a “high probability” monetary policy will remain accommodative for a considerable period. But she noted future policy could be complicated by divergence in interest rates in the United States and Europe, Israel’s largest trading partners.
“Israel’s economy is in a relatively unique position, as it is not especially coordinated with one of the two blocs as opposed to the other, and therefore the policy divergence will have consequences,” she told a news conference.
“The main challenge to policy will be to assess the effects of policy measures in opposing directions expected to be adopted in the U.S. and in Europe on the variables in Israel’s economy – the exchange rate, inflation, real activity, and financial markets.”
The Federal Reserve raised U.S. interest rates this month for the first time in nearly a decade, while the European Central Bank eased monetary policy further.
All 14 economists polled by Reuters had forecast no change by the Bank of Israel, following recent data that showed moderate economic growth and non-existent inflation.
Israel’s economy grew an annualized 2.5 percent in the third quarter, rebounding from near-zero in the prior three months. Flug said the moderate growth rate was reasonable given the global backdrop.
But the annual inflation rate worsened in November to -0.9 percent from -0.7 percent in October. The central bank has largely blamed falling oil and commodity prices for negative inflation.
Inflation is expected to be about 0.3 percent in a year’s time, according to bond yields, below an official target of 1-3 percent.
“Indicators that became available this month point to the recent period’s growth environment … continuing in the fourth quarter as well, and the effect of the security situation is limited mostly to tourism,” the central bank said, referring to a recent wave of Palestinian attacks – mostly stabbings – on Israelis.
In a statement, it also said export data were positive but did not compensate for declines in previous months.
The central bank reduced its 2015 growth estimate to 2.4 percent from a prior forecast of 3.0 percent in September. It sees the economy growing by 2.8 percent in 2016, below a previous 3.3 percent estimate and projects 2017 growth of 3.1 percent, based on improvements in exports and investment in fixed assets.
The central bank expects inflation to be -0.8 percent in 2015, 0.6 percent in 2016 and 1.6 percent in 2017.
The bank’s own staff estimates the key rate will stay at 0.1 percent for the first three quarters of 2016 and start rising in the fourth quarter to end the year at 0.25 percent, then increase to 1 percent by the end of 2017.