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August 28, 2018 10:21 am

Bank of Israel Unlikely to Raise Rates, Not Clear When It Might

avatar by Reuters and Algemeiner Staff

An Israeli flag flutters outside the Bank of Israel building in Jerusalem, August 7, 2013. Photo: REUTERS/Ronen Zvulun/File Photo.

The Bank of Israel is expected to leave short-term interest rates unchanged again this week, with markets seeking clues as to when rates will start to rise.

All 10 economists in a Reuters poll said the central bank would keep its benchmark rate at 0.1 percent — where it has stood since February 2015 — when the decision is announced at 4 p.m. (1300 GMT) on Wednesday.

Analysts are 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 an increase won’t come until 2019.

At the previous rates decision in July, Bank of Israel Governor Karnit Flug said that for rates to rise, inflation needed to be entrenched within the government’s annual target range of 1 to 3 percent.

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Still, five of the six monetary policy committee (MPC) members were in favor of steady rates on July 9. One voted for an increase.

Israel’s annual inflation rate edged higher to 1.4 percent in July from 1.3 percent in June, when it topped 1 percent for the first time since 2014. Bond yields indicate an inflation rate of 1.4 percent in a year time.

Led by a deceleration of consumer spending, economic growth slowed in the second quarter to an annualized rate of 2.0 percent from a 4.8 percent spurt in the prior three months, according to a preliminary estimate.

The Bank of Israel projects economic growth of 3.7 percent in 2018.

Victor Bahar, head of economics at Bank Hapoalim, said a recent strengthening of the shekel reduces the probability of a rate increase this year and is another reason the central bank is likely to stand pat until the first quarter of 2019.

“The Bank of Israel appears more dovish than the Fed, and therefore it is hard to envision rates moving higher in Israel in coming months, as the MPC members see the shekel as over-valued, and inflation is still close to the lower bound of target,” he said.

Wednesday’s decision may be the second-to-last for Flug, who said last month she would not stand for a second five-year term when her tenure ends in November.

Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon have interviewed a number of candidates for the post, including former Argentinian central bank chief Mario Blejer. No decision on Flug’s replacement has been announced.

Kahlon has said that a new central bank governor may be appointed only after the next national election, due in 2019.

If a new governor is not in place by November, Flug’s deputy, Nadine Baudot-Trajtenberg, is likely to replace her in the interim.

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