The Bank of Israel will not tamper with a basically healthy economy, it said on Sunday, as it announced a decision to leave the benchmark interest rate at 0.1 percent, where it has been for more than two years.
The BoI decision was expected, as indicated by a Reuters poll of ten economists, all of whom forecast that the bank would stand pat.
“The economy has been growing strongly for approximately a year and a half, and the pace may even be higher than the long-term growth potential,” the Bank of Israel said, noting the labor market was near full employment. “In the first quarter, the improvement in growth of exports continued, against the background of the expansion of world trade.”
The BoI observed that the annual inflation rate and 1-year inflation expectations increased but remain below the annual target range of 1 percent-3 percent.
“The increase in nominal wages and strong economic activity will contribute to an increase in the inflation rate, while the appreciation that has occurred in the shekel, the increased competition in the economy and measures adopted by the government are expected to delay the return of inflation to the target range.”
The dollar-shekel exchange has settled in at new lows. As of Monday afternoon, it was showing at NIS 3.5590/$, the lowest in three years.
Yet, the Bank seems resigned to the new norm, having discontinued foreign currency purchases to prop the dollar in recent days. This, after buys of hundreds of millions of dollars in foreign currency over the past several months failed to keep the exchange rate above 3.6, much to the consternation of Israeli exporters.
In its statement, the central bank said that while wages were rising, inflation in tradable goods remained negative mainly due to the appreciation of the shekel.
“The increasing competition in the economy, as well as additional policy measures announced by the government –reducing purchase tax and customs on various products and lowering the cost of afterschool care — may continue to slow the return of inflation to the target range,” it said.