Bank of Israel MPC content with current interest rate

Credit: REUTERS/RONEN ZVULUN

All 5 rate setters at the Bank of Israel voted to keep the benchmark interest rate at 0.25% on Aug. 28 and, in a reversal from previous decisions, said rates should not change for a while, minutes of the discussions showed on Wednesday.

By Steven Scheer

JERUSALEM, Sept 11 (Reuters) - All 5 rate setters at the Bank of Israel voted to keep the benchmark interest rate ILINR=ECI at 0.25% on Aug. 28 and, in a reversal from previous decisions, said rates should not change for a while, minutes of the discussions showed on Wednesday.

Committee members cited uncertainty over the inflation outlook and fiscal policy, as well as risks to Israel's economy from an expected slowdown in world trade.

Previously they had held out the possibility of a rate hike this year.

"Committee members were of the opinion that the interest

rate should be left at its current level, and expressed the assessment that it will not rise for a prolonged period," the central bank's minutes said.

Most of the members believed that the recent decline in the inflation environment to below the 1-3% annual target range, together with a combined trend of the shekel's appreciation and negative global economic developments, increase the risk to achieving the goals of monetary policy.

With inflation slipping to 0.5% in July from a peak of 1.5% in May, some economists had started to project either a rate reduction or other easing steps in coming months.

However, the minutes said: "All of the committee members agreed that it is best to wait and examine the trend of inflation and developments in the economy before taking additional accommodative measures."

The minutes showed that the monetary policy committee (MPC) believes the economy is growing at a solid pace and that, so far, the economy and particularly service exports were not affected by the global trade war.

During the previous decision on July 8, the MPC had believed a rate hike in 2019 was still possible, with one member voting for a hike for a third straight meeting.

But much changed since then: inflation dropped, the Federal Reserve lowered U.S. rates and the European Central Bank signaled further expansionary measures.

Bank of Israel Governor Amir Yaron in late July was forced to backtrack on his view that more rate hikes were possible when the shekel ILS= spiked in what turned into a disconnect between the central bank and investors' thinking.

The shekel has gained more than 5% versus the dollar so far in 2019 and policymakers, the minutes showed, believe "the appreciation of the shekel remains the main factor delaying the continued increase of inflation toward the midpoint of the target."

At the same time, the MPC expects the fiscal uncertainty to continue in light of political uncertainty ahead of next week's general election. The budget deficit was well above target at an annual 3.8% of gross domestic product in August.

(Reporting by Steven Scheer; Additional reporting by Ari Rabinovitch; Editing by Andrew Cawthorne)

((steven.scheer@thomsonreuters.com; +972 2 632 2210; Reuters Messaging: steven.scheer.thomsonreuters.com@reuters.net; Twitter: @StevenMScheer))

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