Bank of Israel leaves interest rate unchanged despite jump in growth

The Bank of Israel kept its benchmark interest rate unchanged at 0.1% for a 24th straight month on Monday, effectively dismissing a huge boost in economic growth as an anomaly.

It said extraordinary factors had boosted economic growth at the end of 2016 – a far larger-than-expected annualized rate of 6.2% in the fourth quarter.

The jump was based on an “atypical increase” in sales of vehicles reflecting purchases being brought forward in advance of a revision of taxes at the start of 2017.

“Net of this increase, it may be assessed that the growth rate was slightly above 3%... only slightly higher than the basic growth rate of previous years,” the central bank said.

For all of 2016, Israel’s economy grew 4% and is projected to grow 3.2% to 3.5% in 2017.

At the same time, a trend of falling prices ended after 28 months when the annual inflation rate rose 0.1% in January from a fall of 0.2% in December.

The Bank of Israel played this down too. The increase stemmed from a change in the trend of energy prices and a dissipation of government-mandated price reductions, it said.

It expects inflation will reach 1% – the bottom of the government’s 1%-3% annual target – in late 2017.

“The Monetary [Policy] Committee is of the opinion that the risks to achieving the inflation target remain high, yet the increases in wages and in global inflation are expected to support the return of inflation to the target,” the central bank said.

All 10 economists polled by Reuters had forecast no change by the Bank of Israel, which is widely expected to keep rates unchanged until at least late 2017.

The next decision is slated for April 6. The central bank will only decide on rates eight times a year starting in 2017, down from 12 previously.

STEADY RATES

A report from the Bank of Israel last week showed that policy makers were no longer considering further rate reductions that would bring rates below zero or using unconventional monetary tools such as bond purchases due to a rebound in economic growth and higher inflation.

Its own economists forecast steady policy through the third quarter of 2017 and a 15-basis-point rise in the fourth quarter, followed by another quarter-point increase to 0.5% in 2018.

One policy member, however, believes that the pace of hikes will probably be faster, according to minutes of recent discussions.

Rather than reduce rates, which would be hard, the central bank said it focuses on buying dollars. That weakens the currency, building inflation and boosting exports.

The shekel, however, stands at a twoyear high against the dollar at a rate of 3.66 and is also at a 15-year peak against the euro.

Since the last rates decision a month ago, the shekel has gained 3% against the dollar. The central bank said the strong shekel continues to weigh on goods exports, even as exports improved in 2016.

The Bank of Israel also noted that while there has been a sharp decrease in home prices of late, it was too early to assess if the trend in home costs was changing.