Bank of Israel Holds Key Rate but Says Risks Are Growing

The move disappoints many who thought global uncertainty would prompt the bank to act.

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

The Bank of Israel left its benchmark interest rate unchanged at 0.1% for a sixth straight month on Monday, dashing the hopes of some investors that the bank would act swiftly in response to a rapidly deteriorating global economy.

But the central bank did hold out some hope that recent weakness in Israeli economic growth could prompt another rate cut as early as next month.

“The monetary committee is of the opinion that the risks to attaining the inflation target, and to growth, have increased,” the Bank of Israel said in a statement, citing uncertainties about China, global financial markets and the timing of a U.S. rate hike.

Most economists had forecast no change in the rate, which is at a historical low. But some said in recent days that Governor Karnit Flug might act after the Central Bureau of Statistics reported last week that the economy grew at an anemic 0.3% annual rate in the second quarter, well below expectations of 2.7%.

Meanwhile, expectations for inflation a year from now slipped to 0.7% in mid-August from 1.1% in July. At minus 0.3% in July, Israel has been in a deflationary trend for nearly a year, well below an annual target of 1% to 3%.

The massive sell-off in global stock markets, amid concerns about China’s economy and its impact on world growth, added to expectations that the Bank of Israel would cut the rate and perhaps buttress the measure by quantitative easing. QE aims to add money to the economy by the central bank’s buying of government bonds.

On Monday, some economists were critical of the bank’s failure to act.

“The Bank of Israel’s decision to leave interest rates unchanged is a serious mistake that throws the Israeli economy into the global turmoil without any tools or lifelines,” said Eldad Tamir, CEO of brokerage Tamir Fishman.

Goldman Sachs economist Kasper Lund-Jensen predicted that the next decision on September 24 would be a cut to zero, while the probability of quantitative easing had increased.

“The decision may be a bad mistake if the global crisis worsens quickly and the Bank of Israel is forced to convene the monetary committee and make a mid-term rate cut,” said Moshe Shalom of USG Capital. “The fact that the central bank expressed confidence in the Israeli economy may calm things a bit, but the Bank of Israel would never convey panic.”

David Masika, CEO of currency trader Matach24, said he believed the bank was waiting to see whether the U.S. Federal Reserve would raise its lending rate before deciding how to act. But he said he doubted Flug would move too quickly.

“Governor Flug it seems will use aggressive tools only in the long run, so any big changes in the interest rate don’t seem to be on the horizon right now,” he said.

In foreign currency trading, the dollar edged up 0.1% against the shekel to a Bank of Israel rate of 3.8870. The euro, by contrast, surged more than 2.3% to 4.4582, following a global trend as investors sought a safe haven for their money during the global turmoil.

The European currency retreated in late trading to 4.4365, but the dollar plunged 1% and was trading at 3.8378 after hours on Monday.

The central bank is trapped by conflicting needs. On the one hand, exports and the economy would get a boost from a weaker shekel prompted by a rate cut. Further economic weakness would complicate the yet-to-be approved 2015/16 budget, which targets a deficit of 2.9% of gross domestic product.

But the bank has to worry about acting too hastily and fanning the flames of an already overheated real estate market by making mortgage costs even cheaper.

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