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October 3, 2019 11:12 am

Bank of Israel to Hold Key Rate Next Week, Possibly Cut in November: Reuters Poll

avatar by Reuters and Algemeiner Staff

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

Israel’s central bank is expected to leave short-term interest rates unchanged next week but analysts believe a rate reduction remains possible this year as long as inflation stays very low.

Twelve of 13 economists polled by Reuters said policymakers would keep the Bank of Israel’s benchmark rate at 0.25 percent when it announces its decision at 4 p.m. (1300 GMT) on Monday. One analyst expects a 15 basis point cut.

After making a surprise increase from 0.1 percent last November, the monetary policy committee (MPC) has left the key rate unchanged at its six subsequent meetings, the last being Aug 28.

Economists largely believe a strong economy and tight labor market will keep the central bank on hold this month, even as inflation remains below the government’s annual 1-3 percent target range at a 0.6 percent rate in August. The rate had dropped to a low of 0.5 percent in July from 1.5 percent in May.

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At the same time, Israel’s budget deficit is near an annual rate of 4 percent of gross domestic product and there is little the government is able to do to reduce it until a new government is in place — a process that could take until late in the year or early 2020.

“With no fiscal consolidation in sight, I doubt the MPC wants a looser monetary policy,” said Jonathan Katz, chief economist at Leader Capital Markets.

At the August decision, the MPC reversed course from a belief that rate increases were possible this year by saying the rate will not rise for a prolonged period.

It cited uncertainty over the inflation outlook and fiscal policy as well as risks to Israel’s economy from an expected slowdown in global trade.

It also said that before taking any further accommodative measures to match easier policy by global central banks, it was best to examine the inflation trend and economic developments.

Still, JP Morgan economist Yarkin Cebeci said he expects a 15 basis point reduction next week to help weaken the shekel, which has gained 6.5 percent against the dollar this year, since the central bank has expressed concerns that a strong shekel has pushed the inflation rate down.

Amir Kahanovich, chief economist for the Excellence Investment House, projects a possible cut at the next meeting in late November and negative rates in 2020.

In addition to the rate decision, the Bank of Israel on Monday will publish updated macro forecasts.

In its prior update in July, the bank’s staff had forecast an interest rate of 0.5 percent by the end of 2019 and a 1 percent rate in 2020. It also foresaw economic growth of 3.1 percent this year and 3.5 percent in 2020, with inflation at 1.6 percent in both years.

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