Surprise Hike in Lending Rate

Nadine Baudot-Trajtenberg may only be the Acting Governor of the Bank of Israel until Amir Yaron takes over as successor to Karnit Flug, but that doesn’t mean she will just be warming the seat in the meantime.

As chairwoman of the bank’s monetary committee, Baudot-Trajtenberg led the decision to raise the interest rate by 0.15 basis points from 0.1 percent to 0.25 percent. This is the first interest rate hike since June 2011 and the first rate change since March 2015, when it was cut to the historic low of 0.1 percent.

The decision took most analysts by surprise. Just two of the 12 economists surveyed by Reuters had forecast a rate hike, while 10 said they expected the rate to remain unchanged at 0.1 percent.

Saar Golan, a trader at Tel Aviv-based Meitav Dash Brokerage, one of those who had forecast the rate to remain unchanged, said: “It’s a surprise move especially since the new governor of the Bank of Israel has not yet taken up his post.”

Yaron arrives in late December.

Baudot-Trajtenberg acknowledged that it seemed unusual that such an important decision be made while the bank was “between governors.” But, she said, the Monetary Committee discussed the propriety of it and concluded only the relevant economic data should be taken into account in making the decision.

In explaining its decision the bank said, “After a continued rise in inflation since the beginning of 2018, the inflation rate is stabilizing slightly above the lower bound of the target range and is expected to remain within the target in the coming months as well. One-year expectations and forecasts from the various sources hover around the level of one percent. Medium-term expectations remained entrenched within the target range. The rise in wages in the economy and the expansionary fiscal policy will support the continued entrenchment of inflation within the target. The main risk to this is the possibility of a sharp appreciation of the shekel.”

Additionally, “An analysis of the data and of updated indicators of economic activity leads to the assessment that the economy is converging to its potential growth rate. In the second and third quarters there was some slowdown in the economy’s growth rate, but current indicators of activity support the assessment that the economy is at full employment, and in particular the tight labor market data indicate a high level of demand.”

On the shekel the Bank of Israel said, “Since the previous interest rate decision, the shekel weakened by 3.6 percent in terms of the nominal effective exchange rate and by 3.2 percent vis-à-vis the dollar.”

On real estate prices: “Home prices stabilized in recent months. The number of transactions and mortgage volume appear to be stabilizing, with a slight increase in mortgage interest rates.”

The Bank of Israel is expected to raise the interest rate one more time in 2019.