Bank of Israel Governor Amir Yaron said on Thursday it would need a significant economic slowdown for policymakers to lower short-term interest rates.
“There has to be a more significant deterioration in economic activity,” Yaron told reporters after the Bank of Israel held its benchmark interest rate at 0.25% at a policy meeting, as widely expected amid a stable shekel and solid economic growth.
“Risks of a marked deterioration in the global economy declined and growth is expected to improve in 2021,” he said.
Yaron pointed to both the U.S. Federal Reserve and European Central Bank as currently stopping any further easing as well as a rate hike in Sweden.
In an updated forecast, the bank’s own economists reiterated a view that the key rate would either remain unchanged or fall to 0.1% this year, with a gradual rise in the rate towards the end of 2021.
Yaron and other monetary policy committee members have made it clear that they would prefer to leave the rate unchanged and use other tools like foreign exchange intervention to prevent a further shekel appreciation, which has already helped trigger a sharp drop in inflation to an annual rate of 0.3% in November.
“The committee is taking additional steps as necessary to make monetary policy more accommodative,” Yaron said, declining to elaborate.
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Since the previous rate decision on November 25, the Bank of Israel has bought more than $3.5 billion of foreign currency, which has led to a stabilization of the exchange rate.
The shekel gained 8.3% versus a basket comprising the currencies of Israel’s main trading partners in 2019, “a development that continues to make it difficult to return inflation to the target range,” the bank said in a statement.
Yaron noted that the strength was beyond what would expect as a result of a healthy economy and partly blamed some of the gains to “short-term financial factors.” He declined to specify what these factors were but analysts believe they are speculators.
Israel’s economy grew an estimated 3.3% last year but the central bank’s staff projects a slowdown to 2.9% in 2020 - with 0.3 percentage points of that coming from the start of natural gas production at the Leviathan field.
Yaron said the weaker growth will stem from a markedly contractionary fiscal effect in the first half of 2020 in the absence of an approved 2020 budget, given the year-long political stalemate and the current caretaker government’s limited ability to act. A third election in less than a year is slated for March 2.
“There is uncertainty regarding the fiscal policy that will prevail after the elections, as it is likely to be contractionary as well, should necessary steps to deal with the rising deficit be taken,” he said. “As long as the political and fiscal uncertainty continues, it sharpens the need to keep monetary policy accommodative in order to support growth.”