Fed pushes Flug towards rate hike

Karnit Flug  photo: Eyal Izhar

The US Federal Reserve's hawkish policy will compel the Bank of Israel's Monetary Committee to seriously consider a rate hike when it next meets.

The US Federal Reserve's hawkish policy will compel the Bank of Israel's Monetary Committee to seriously consider an interest rate hike when it next convenes of October 8. This will be the last meeting headed by Governor Karnit Flug whose term of office ends on November 12.

While the Bank of Israel has kept the interest rate at an historic low of 0.1% since 2015, the Fed has raised the rate eight times to 2%-2.25%. Moreover, the Fed sees another rate hike in December, three more in 2019 and another in 2020.

Nevertheless, many economists believe that Flug will find it difficult to raise the interest rate now with the shekel strengthening of late and inflation struggling to remain within the government's annual 1%-3% target range (it is currently 1.1%). But delaying a rate hike in October could postpone it for several months because it is unclear who will succeed Flug.

Flug's decision will likely be significantly influenced by the Fed because Israel's yield curve is much steeper than the US yield curve. This stems from Israel having a far more dovish expansionist policy, which is expected to continue for several more years.

Meanwhile the difference between Israeli government two-year bonds and 10 year bonds is just 0.23%.

Published by Globes [online], Israel business news - www.globes-online.com - on September 27, 2018

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

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