Bank of Israel to Hold Key Rate at 0.25 Percent on Strong Shekel: Poll
Israel’s central bank is expected to hold the line on short-term interest rates this week for a fourth straight decision amid a strengthening shekel that has helped to contain inflation while the economy sped ahead in the first quarter.
Ten of 11 economists polled by Reuters said policymakers would leave the Bank of Israel’s benchmark rate at 0.25 percent when it announces its decision at 4 pm (1300 GMT) on Monday. One economist predicted an increase to 0.5 percent.
After making a surprise increase from 0.1 percent on Nov. 26, the central bank has left the key rate unchanged at its subsequent policy meetings in January, February and April.
Most economists believe the next rate increase will take place later this year, citing a surprising moderation in inflation last month and a shekel that last week hit a new record high versus a basket of currencies of Israel’s largest trading partners.
The central bank’s own economists project a rate increase to 0.5 percent towards the end of the third quarter of 2019 and two more hikes in 2020 to bring the rate to 1.0 percent by the end of next year.
The strong shekel, which has also gained versus the dollar and euro, helped to moderate Israel’s inflation rate to 1.3 percent in April from an expected 1.5 percent and 1.4 percent in March. Israel has an official inflation target of 1 percent-3 percent.
Israel’s economy remains strong, with annualized growth of 5.2 percent in the first quarter, partly boosted by a rush to buy cars ahead of a tax hike in the second quarter. Growth is expected at around 3.5 percent this year.
Economists said the Bank of Israel would have a tough time raising rates when central banks around the world are poised to loosen policy this year.
“This poses a dilemma for the Bank of Israel since present policy rates are not in line with the tight labor market, the high fiscal deficit, and the recent renewal of housing price increases,” Bank Hapoalim economist Victor Bahar said.
“The chances of a rate hike in coming months has declined significantly.”
Minutes of the April 8 decision showed that four of the five monetary policy members voted to leave rates unchanged, while one voted for a hike on a view that the rate was not in line with the state of the economy while inflation has been within the target for some time.
Similarly, Bank Leumi Chief Economist Gil Bufman forecast a quarter-point rate increase this month, saying growth was strong in the first quarter even after stripping out the surge in car sales, while inflation remains within the government’s target.