Bank of Israel leaves interest rate unchanged

Karnit Flug  photo: Eyal Izhar

At the same time, the central bank signaled that an interest rate hike is likely before the end of the year.

The Monetary Committee of the Bank of Israel has decided to leave the central bank's key interest rate unchanged at 0.1%, the Bank of Israel announced today. At the same time, the bank sent a strong signal that it intends to raise its interest rate in November for the first time since March 2015, and that a further interest rate hike can be expected in 2019.

According to the updated forecast from the Bank of Israel Research Department, released together with the interest rate announcement, the interest rate will rise by 0.255 by the end of the year.

The decision on raising the interest rate, assuming it happens, will be made at one of the three dates on which the Monetary Committee is due to convene before the end of this year: August 29; October 8; and November 26. The assessment is that the committee will wait until its last meeting, in November.

Explaining its decision in today's announcement, the Monetary Committee states: "Inflation environment continues to rise gradually, supported by the accommodative monetary policy, and is approaching the price stability target range. Inflation over the 12 months ending in May was 0.5 percent, and inflation according to adjusted indices remains below the target. Since the last interest rate decision, there has been an increase in inflation expectations from the various sources, and they are near or slightly above the lower bound of the price stability target range.

"Following rapid growth in the first quarter, economic growth in the second quarter is expected to stabilize at a pace that is in line with potential. Goods exports have moderated in recent months. The labor market remains tight and wages are increasing, while more companies are reporting difficulties in hiring workers.

"Data regarding the global economy remain positive, although global growth seems to be losing momentum. In recent weeks, the risk of an intensifying trade war has again increased. Inflation in the US converged with the Fed’s target, and the Fed is continuing to raise the interest rate. In the other advanced economies, inflation is rising gradually, while monetary policy remains very accommodative.

"The effective exchange rate remains relatively stable. Since the previous interest rate decision, there has been a depreciation of about 1 percent, following an appreciation in the weeks that preceded it.

"Home prices have declined by 2.4 percent since peaking in August of last year, while the rise in rental prices has accelerated somewhat. Both building starts and investment in residential construction show a significant decline."

"The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. The Bank of Israel continues to monitor developments in inflation, the real economy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments."

The Research Department's forecast for 2019 projects two interest rate rises, contrary to market expectations of three rate hikes or more.

In her remarks at the press briefing following the interest rate announcement, Governor of the Bank of Israel Karnit Flug said that were signs of a slight slowdown in the rate of economic growth in Israel, although growth remained solid. She said that global growth was also showing signs of slowing, because of the fears of a trade war. "The US economy continues to display resilience, but data from the other major economies were not as good. Emerging markets, particularly those whose macroeconomic fundamentals are relatively weak, are at risk due to the tightening of financial conditions. In addition, a possible heightening of political risks, particularly in Europe, and in the geopolitical tension in various areas around the world, can increase the risk to continued growth," Flug said.

On prices, Flug said that there had been a certain rise in the inflation environment, but that on the other hand the government was continuing to initiate price reductions. "In particular, in recent weeks it appears that the rise in the inflation environment was internalized, and expectations for short terms rose sharply. Based on the forecasts and expectations from the various sources, in the coming months inflation as measured over the preceding 12 months is expected to enter the target range defined as price stability for the first time in about 4 years," she said.

On the housing market, Flug noted that "since home prices reached a record high, they have declined by a cumulative 2.4 percent," but added, "On the supply side, the sharp and prolonged decline in the number of building starts is worrying, and it is important that the government continues to act to increase the housing supply."

Asked about the letter that she sent to the prime minister and that was released for publication, in which she said that she would not seek a further term as governor of the Bank of Israel and stressed the need to preserve the independence and professionalism of the central bank in deciding on the appointment of the next governor, Flug said, "History shows that there are all kinds of appointment procedures, and it is very important that the process should be respectable and timely." On the qualities that would be required in her successor, she said, "I think that it is very important that it should be a professional, an economist of stature, and someone who can express a professional opinion fearlessly."

On the Bank of Israel Research Department forecast, Flug said, "The inflation path in the forecast is slightly higher than that in the previous forecast, primarily as a result of the increase in energy prices, and after inflation enters the target range in the coming quarter it is expected to continue to increase very moderately toward the midpoint of the target; at the end of 2018 the Department assesses that the inflation rate will be 1.2 percent, and in a year it will be 1.4 percent. The interest rate path in the forecast did not change, and it is important to reiterate that it is a path that the Department forecasts, which is dependent on the development of other variables, and it is obviously not a commitment by the Monetary Committee."

As one of her achievement, Flug mentioned that fact that the government had not reduced taxes, despite higher than forecast tax revenues last year. "According to data released today, tax revenues this year are in line with projections, and the minister of finance acted correctly in not cutting taxes," she said.

Published by Globes [online], Israel business news - www.globes-online.com - on July 9, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Karnit Flug  photo: Eyal Izhar
Karnit Flug photo: Eyal Izhar
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