Interest Rate Unchanged, Growth Forecast Cut

The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, left the interest rate for the next two months unchanged at 0.25 percent. The rate was raised to 0.25 percent last November from its historic low of 0.1%.

The Bank explained its decision on Monday, saying: “The inflation environment is above the lower bound of the target range, and recently it has increased slightly, with the economy being at a full employment environment.

“Since the beginning of the year, most CPI readings have surprised to the upside. The inflation rate over the preceding 12 months has been 1.5 percent, and it currently seems less likely that inflation will again fall below the lower bound of the target range. Most one-year inflation expectations and forecasts are slightly above the lower bound of the target range, and forward expectations for medium and longer terms remained near the midpoint of the target.”

On the persistence of a strong shekel, the Bank noted that “in the past year, the shekel has strengthened by 4.3 percent in terms of the effective exchange rate. In the intermediate period, the shekel was relatively stable vis-à-vis the dollar and the euro, and depreciated slightly in terms of the nominal effective exchange rate. If the appreciation resumes, it is expected to delay the continued increase of the inflation rate toward the midpoint of the target.”

In a separate paragraph, the Committee said that “the rising path of the interest rate in the future will be gradual and cautious, in a manner that supports a process at the end of which inflation will stabilize around the midpoint of the target range, and that supports economic activity.”

Meanwhile, the shekel weakened on Monday against the dollar while strengthening against the euro. In afternoon inter-bank trading, the shekel-dollar exchange rate was reported up 0.31 percent against the dollar at NIS 3.573/$ and down 0.12 percent against the euro at 4.008/€.

The impact of external developments was assessed by Prico Risk Management and Investments CEO Yossi Fraiman, as quoted by Globes:

“Better than expected economic data published in the U.S. support the strengthening of the dollar including in Israel, together with a reduction of foreign currency supply from exporters, which is also contributing to the strengthening of the dollar. The dollar rate remains sensitive to events in the energy market, including first and foremost the tensions between the U.S. and Iran and the pressure by the major powers on Iran to halt raising the percentage of its uranium enrichment program. The trade war between the U.S. and China and the ousting of the central bank governor in Turkey also support a strong dollar. On the other hand, the U.S. President is again threatening to improve trade terms by using a low exchange rate, and there is a risk that Europe will draw a U.S. reaction and even the imposition of taxes on goods that will distort terms of trade, and steps that will encourage exports.”

Fraiman was critical of the Bank of Israel’s timing: “Against a background of uncertainty regarding the steps that will be taken by the U.S. Federal Reserve regarding cutting the dollar interest rate, at its meeting at the end of the month, and the trend among central banks to encourage economic activity, among other things by cutting the interest rate, we believe that the Bank of Israel was late in stocking up on ammunition and returning the market to a normal situation by raising the shekel interest rate. The Bank of Israel will prefer to wait before raising the interest rate.”

Caption

Governor of the Bank of Israel Prof. Amir Yaron. Yonatan Sindel/Flash90