Bank of Israel Chief Vows ‘Cautious and Gradual’ Rise in Interest Rates

The central bank also reduces its 2019 economic growth forecast to 3.4%, down from a previous prediction of 3.6%

Amir Yaron, governor of the Bank of Israel, at the president's residence, December 24, 2018.
Oren Ben Hakoon

Bank of Israel Governor Amir Yaron said Monday that monetary tightening would be slow after the central bank left interest rates unchanged in Yaron’s first decision.

“Our steps are going to be very gradual and cautious in order to let the inflationary process move forward,” he told reporters after the decision.

Israel’s base rate had been unchanged for more than three years until November when in the interim before Yaron took office, the monetary committee raised it in a surprise move to 0.25% from 0.1%.

Meanwhile, in an updated forecast, the central bank’s economists said they expect the key rate to remain on hold for the first half of 2019 and rise once in the third quarter to end the year at 0.5%. They foresee another hike in the first quarter of 2020 and a rate of 1.25% by the end of next year, with inflation at 1.3% this year and 1.8% in 2020.

“If these forecasts are realized, they will be consistent with gradual contraction of the monetary policy accommodation,” Yaron said, adding: “I don’t expect any significant impact from the election on the economy.”

Modi Shafrir, chief strategist at Mizrahi-Tefahot Bank’s finance division, called both the statement and Yaron’s comments “dovish.”

The shekel had weakened 0.7% to a representative rate of 3.6940 on Monday to the dollar, but after the rates announcement, the currency reversed course to 3.7078 shekels late in the day.

In keeping rates steady, the Bank of Israel said data showed the economy was performing well and the labor market was tight, with economic weakness in the second and third quarters due to one-time factors. The bank believes continued wage increases will help push inflation higher.

Israel’s economy grew an estimated 3.2% in 2018 — below a 3.7% forecast — and the Bank of Israel expects a 3.4% rate this year, down from a previous estimate of 3.6%.

Yaron noted that along with a decline in Israel’s current account surplus and the widening interest rate gap with the United States, the shekel has depreciated gradually. If the trend changes, that could slow the increase in inflation toward 2%, he said.

Although the central bank has not intervened in the foreign exchange market for almost a year, Yaron said intervention was still one of the bank’s policy tools.

“To the extent that there will be anomalous fluctuations that are not in line with fundamental economic conditions, the foreign exchange market intervention tool is still available to the Bank of Israel,” he said.