Bank of Israel Hints Rate Hike Is Nearing but Keeps Interest at 0.1%

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One hundred shekel currency banknotes sit on display in this arranged photograph at Israel's central bank in Jerusalem, Israel, on Monday, Aug. 19, 2013
One hundred shekel currency banknotes sit on display in this arranged photograph at Israel's central bank in Jerusalem, Israel, on Monday, Aug. 19, 2013Credit: Bloomberg

The Bank of Israel announced Wednesday that it would hold its benchmark interest rate at the historically low 0.1% it has been at for over three years, but hinted it would be raising that rate in the coming months.

The monetary policy committee, headed by Bank of Israel Governor Karnit Flug, decided once again to hold off on changing the rate. Still, the announcement on the interest rate included for the first time a hint of raising the interest rate in the foreseeable future, on condition that the shekel does not strengthen out of proportion.

“The monetary committee intends to leave the expansive policy unchanged, as long as the matter is not required to base the inflation range within the target area,” the monetary committee declared, as it had about the previous decision.

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Alongside this, the committee added for the first time a statement that “the inflation environment continues to rise with the support of the expansive monetary policy, and shows a sign that it is starting to form a base in the target area of price stability.” The announcement about the decision regarding the interest rate stressed that “the principal risk for the inflation becoming established within the target is the possibility of a sharp appreciation of the shekel.” In other words, raising the interest rate is expected to be postponed if the shekel will strengthen significantly.

Last June, after four years of inflation below the target range, and even negative inflation at times, inflation in Israel reached the target range. In July, it even climbed a little to 1.4%. Still, Flug signaled last June that the monetary committee would begin to raise the rate only when it would get the impression that inflation not only had entered the range but also would stay there several months and not get too close to the edges.

Analysts at Leumi Capital Markets this week said they believed inflation had peaked in July, and forecasted that it would fall in the coming months, particularly in 2019 to a level below 1%.

Dori Resnick of Leumi Capital Markets gave a few possible reasons why he expected inflation to decline. First, there has been a slowdown in the rise in housing prices. Second, the shekel-dollar rates have stabilized. Third, oil prices have stabilized and have even dropped a little. Fourth, global raw material prices have fallen, save for energy. Fifth, the influence of the last minimum wage hike has dissipated. And, lastly, there lacks a plan for any major hikes.

Bank Leumi’s economics department said Wednesday that given Israel’s less than impressive GDP growth, the need has become stronger for there to be monetary and budgetary coordination in order for Israel to be able to cope with the next economic slowdown.

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