After keeping its key lending rate at a record low since February 2015, the Bank of Israel’s decision-makers appear to be moving closer to a rate hike as inflation has risen back into the government’s target range.
Minutes from the August 29 meeting of the bank’s monetary policy committee released Wednesday show that two of the committee's six members – none of whom are ever identified by name – no longer believe that the benchmark interest rate should remain at 0.1%. One of the two voted for a 15-basis-point increase to 0.25%, similar to the previous four decisions, while for the first time a second member wavered, voting to keep the rate unchanged but expressing reservations.
The second member maintained that there was room for an increase because the rate is no longer in line with the “state of the economy.” Still, he or she opted to vote with the majority since “the possibility for such a step has not yet been recognized by the financial markets.”
Four of the five members who voted for no change pointed out that inflation was moving toward “entrenchment” within the government’s 1% to 3% target range. Israel’s inflation rate reached 1.4% in July, the last month for which there are figures.
At the same time, “there is room to begin preparing the markets for the possibility of a measured increase in the interest rate; nonetheless, to support the entrenchment, the interest rate should be kept at its current level for now,” the minutes said. “[The members] agreed that if the interest rate begins to rise before the inflation rate is entrenched within the target range, it could delay the entrenchment of the inflation environment and ultimately slow the path of increasing the interest rate.”
Analysts have been split over the timing of a rate increase. Some, including the central bank’s own economists, expect a 15-basis-point increase in the fourth quarter. Others believe that an increase won’t come until next year, when the central bank expects the key rate to reach 0.5%.
Bank Leumi Chief Economist Gil Bufman said the minutes seemed to signal that the committee would raise rates by the end of the year, with the timing dependent on August inflation data due Friday.
“They will try to maintain their credibility by moving according to the forecast,” Bufman said, referring to the forecast by the central bank’s economists of a hike by year-end.
The next rate decision will be on October 8, which may also be the final meeting for Bank of Israel Governor Karnit Flug, whose term ends in mid-November. A successor has yet to be named. The final decision in 2018 is set for November 26.
The committee noted that the possibility of a stronger shekel was a risk to keeping inflation within its target range. The shekel has been strengthening, with the representative rate set on Wednesday at 3.588 to the dollar versus 3.64 in late August.
Members of the committee also downplayed a slowdown in economic growth in the second quarter to an annualized 2% rate from 4.8% in the previous three months, pointing to several more recent indicators that show the economy “continuing to grow at a solid pace,” led by strong consumer spending.