Bank of Israel Holds Rate in Place but Hints at Other Ways to Spur Growth

The central bank talks about ‘various tools’ it may use with the base rate at a record low.

Bank of Israel Governor Karnit Flug.
Bank of Israel Governor Karnit Flug.Credit: Emil Salmon

The Bank of Israel left its benchmark interest rate unchanged at 0.25% for a second straight month Monday, but hinted it may use quantitative easing to help spur inflation and economic growth.

“The bank will examine the need to use various tools to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market,” it said.

The central bank, led by Governor Karnit Flug, has already reduced its base lending rate twice in recent months to a record low as its seeks to boost an economy beset by slowing growth, negative inflation and until recently a muscle-bound shekel that was deterring exports.

Quantitative easing, or QE, would have the central bank buying government bonds or perhaps foreign currency as a way of injecting more liquidity into the economy. It’s an alternative strategy to rate adjustments that was last used in 2009 when the world economy was tumbling into a deep recession and global financial markets were seizing up.

Hurt partly by the fallout from the 50-day Gaza war over the summer, the government expects gross domestic product to grow just 2.2% this year, down from 3.2% in 2013.

Meanwhile, Israel moved to deflation in September, with the consumer price index falling 0.3%, the first negative CPI since 2007. The government’s annual target for inflation is 1% to 3%.

Nevertheless, eight of 12 economists polled by Reuters had forecast no interest rate move, with four others predicting a rate reduction of 0.1-0.15 percentage point. But they were are divided about what the bank can or should do, with many skeptical about the need or effectiveness of a rate cut or QE.

“Despite low inflation and increasing signs of a slowdown, it appears the Bank of Israel wanted to avoid sending the bearish message that a zero interest rate would have delivered,” said Moshe Shalom, head of research at currency trader FXCM. “In addition, the strengthening of the dollar in recent months has enabled the Bank of Israel to take a break from rate reductions.”

The dollar, which over the weekend reached a 21-month high against the shekel at 3.793, pulled back on Monday, trading at 3.7716 shekels late in the day. But Shmuel Ben-Arieh, research chief at Pioneer Wealth Management, said he was disappointed by the decision to hold rates in place.

“The Bank of Israel is starting to lose its credibility,” he said. “Until today, Governor Flug had shown that every time inflation came in under expectations and demand was falling she provided a monetary response. But this time, after another especially disappointing inflation figure, perhaps the most disappointing of the year, it was decided not to do anything.”

For its part, the Bank of Israel said its monetary committee wanted to see the impact of the two interest-rate reductions it made over the summer before acting further.

“The shekel rate is so weak, and that’s something they had wanted, it was actually a goal of loosening monetary policy, so they have got to be very happy about where the currency is,” Daniel Hewitt, an emerging-markets economist at Barclays, told Bloomberg News before the announcement.

“Also, in the past couple of days we’ve actually had some pretty good growth figures, so they might feel a little bit more comfortable with growth.”

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