Israel's Central Bank Takes Dovish Stance on Interest Rates

Monetary panel signals no hike in base lending rate likely anytime soon

File photo: Israel's central bank chief Amir Yaron speaks at a news conference in Jerusalem, January 7, 2019.
Steven Scheer/Reuters

The Bank of Israel monetary committee surprised no one on Monday by holding its base lending rate unchanged at 0.25%, but more than that, it also signaled that no rate hike was imminent. The committee also appeared to downplay concerns about slowing economic growth.

The central bank took markets by surprise in November by raising the base rate from a record low 0.1% – its first increase in seven years – in the interim between Karnit Flug’s stepping down as governor and Amir Yaron’s taking office.

Since then, the monetary committee has met twice without changing the rate.

>> Read more: Recent data doesn't justify Israel's central bank rate hike ■ By raising interest rates, central bank makes clear Israel's economy is looking good

In holding the rate, the committee noted on Monday that inflation remained near the lower end of the government’s target range of 1-3% annually. It also cited the exchange rate, noting that the shekel had strengthened 2% as measured by the nominal effective exchange rate.

“If the appreciation continues, it could delay the inflation rate’s rise toward the midpoint of the target,” the committee said.

That last comment showed that the Bank of Israel is in no rush to raise interest rates anytime soon, said Ofer Klein, chief economist at Harel Insurance & Finance. “The stress given in the announcement on foreign currency and especially the expression ‘midpoint of the target’ instead of the ‘target’ gives it a dovish coloring,” said Klein.

Amir Kahanovich, chief economist for Excellence Investment House, went a step further, telling Bloomberg News he believed that November rate increase “was a mistake.” He said he sees inflation decelerating and economic growth slowing, leaving the central bank to either leave rates where they are “or to take them down.”

Consumer prices have been stabilizing in the last several months, falling 0.1% on a month-on-month basis in January and leaving the rate over the past 12 months at 1.2%. In seven of the last eight months, the annualized consumer price index has ranged between 1.2% and 1.4%.

Discounting volatile items in the CPI, such as energy and fresh produce prices, inflation has been well below the target range. In addition, inflationary expectations for the next 12 months as measured by economists’ forecast and by bond yields are below the target range.

The other factor in the monetary committee’s considerations was the state of the Israeli and world economies.

On the latter, the Bank of Israel signaled pessimism, noting the growth rates were slowing as was inflation. The main risks include the slowdown in Europe, an escalation of the trade war, and Brexit.

Regarding Israel, its view was rosier. After slowing in the second and third quarters of last year, the committee noted that the pace picked up again in the fourth quarter, although it added little color beyond that. While Israel’s unemployment rate increased slightly, it said the labor market ”remains tight and supports the assessment that the economy is in a full employment environment.”

That assessment contrast with remarks made last week by Nadine Baudot-Trajtenberg, the Bank of Israel’s deputy governor who is due to step down at the end of the month.

Speaking at the Citi Investor Conference in London, she said: “As we enter 2019, you will note that the focus of the discussion has somewhat shifted, with our recent concerns putting a bit more emphasis on the uncertainty surrounding the pace of real economic activity in addition to upholding our mandate of maintaining price stability.”