The Bank of Israel Monetary Committee, headed by Governor Karnit Flug, has kept the interest rate for November unchanged at 0.1%. This was Flug's last decision before leaving next month at the end of her five year term of office.
Some analysts had speculated that Flug might be tempted to push for a rate hike but most expected it to remain unchanged. Analysts are split on whether the hike will be made next month or in early 2019. 15 central banks in the world raised their interest rates in September including the US Fed. The widening interest rate gap between the shekel and other foreign currencies, especially the dollar, puts the Bank of Israel under pressure to hike the interest rate sooner rather than later.
Flug lowered the rate to its historic low of 0.1% in March 2015 and it has remained rooted there since.
In explaining its decision today, the Bank of Israel said, "The inflation environment has not changed markedly since the previous interest rate decision, despite slightly lower than expected recent CPI readings: The annual inflation rate is in the lower part of the target range, and expectations for the various ranges remained in their environment of the previous interest rate decision. Nevertheless, the Monetary Committee assesses that the forces supporting an increase in inflation still prevail; the main risk to the entrenchment of inflation within the target is the possibility of a sharp appreciation in the shekel."
On the general economy, the Bank of Israel continued, "Preliminary estimates of third quarter activity support the assessment that the economy continued to grow at a solid pace, while the second quarter growth rate was affected by transitory factors. The downward trend in the current account surplus is a further indication of the expansion of demand in the economy. The labor market remains tight. Based on the Research Department’s staff forecast, GDP is expected to grow by 3.7% in 2018 and by 3.6% in 2019."
"The shekel is at an appreciated level similar to that of the previous interest rate decision, despite volatility between the meetings, with a slight appreciation of 0.2% in terms of the nominal effective exchange rate for the intermeeting period."
"The downward trend in home prices, which began approximately a year ago, has halted. The increase in new mortgage volume continues, and mortgage interest rates remain stable. Building starts increased in the second quarter, but their volume remains very low."
Published by Globes [online], Israel business news - www.globes-online.com - on October 8, 2018
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