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Bank of Israel to Keep Key Rate at 0.1% for 15th Straight Month

Tel Aviv, IsraelTel Aviv, Israel
Tel Aviv, Israel

The Bank of Israel is expected to leave short-term interest rates unchanged for a 15th straight month, as policymakers appear content with the economic and inflation environment despite sluggish first quarter growth.

Twelve of 13 economists polled by Reuters believe the central bank will keep its benchmark interest rate at a record low of 0.1 percent when the decision is announced on Monday at 4 p.m. (1300 GMT).

Last month, all four rate setters voted for no change and Bank of Israel Governor Karnit Flug said on Wednesday she expected the interest rate to remain low for a considerable time.

Flug also said the monetary policy committee would examine data from last week that showed Israel’s economy growing slower than expected in the first quarter at 0.8%, which was mostly a result of a drop in exports.

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But most analysts say it may have been a temporary dip, pointing to strong consumer demand, and do not expect Flug and her team to change course.

“We estimate that the bank will not take a significant step this time, but it might hint at possible steps in case the situation continues or even gets worse,” said Israeli investment house Halman-Aldubi in its weekly outlook.

Only one economist polled thought the bank would cut interest rates to zero.

Jonathan Katz, chief economist at Leader Capital Markets, said he believed the bank would drop its rate due to weak first quarter growth and because inflation, excluding energy prices and government measures, fell rather sharply in April for the first time in several months.

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Israel’s annual inflation rate moved to -0.9% in April from -0.7% in March, well below the government’s target of 1 to 3%. Bond yields suggest inflation will edge up 0.1% in the coming 12 months, after being flat a month earlier.

The Bank of Israel has attributed the 20-month deflation trend mainly to external factors such as falling oil and other commodity prices, as well government-initiated price decreases, since consumer demand is strong.

The Bank of Israel expects 2.8% growth in 2016, after 2.5% last year.

The bank’s own economists expect the benchmark interest rate will stay at 0.1% for the first three quarters of 2016 and start rising in the fourth quarter to end the year at 0.25%, then increase to 1% by the end of 2017.

In keeping rates steady last month, minutes of the discussion showed, the committee members emphasized that medium and long term inflation expectations are stable, and that “expectations for inflation from 1 year from now to 2 years from now remain close to the target.”