BoI expected to keep key interest rate at 0.1%

The Bank of Israel is expected to keep shortterm interest rates unchanged for a 25th straight month this week as a strong shekel looks to push inflation below the bank’s estimate.

All 12 economists polled by Reuters forecast the central bank will hold its benchmark rate at 0.1% on Thursday at 4 p.m.

Last month, all four rate setters voted for no change in rates, saying inflation was increasing, but the strong shekel was weighing on exports.

The shekel has gained 6% so far in 2017 and is trading at a two-and-a-half-year high against the dollar, close to a 15-year peak versus the euro and at an all-time high against a basket of currencies.

As a result, import prices have fallen, and economists widely believe the inflation rate will not reach 1% in 2017 as the central bank estimates. It had been negative for 28 months until January and was 0.4% in February. Based on bond yields, a rate of zero is expected in a year’s time.

“This is partly driven by the stronger shekel but also by the potential notion of additional VAT cuts,” Goldman Sachs economist Sara Grut said. “The stronger exchange rate remains the main culprit for any rate hikes by the Bank of Israel this year, while the strong domestic economy will keep the [bank] from easing monetary policy further.”

Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon have said they may reduce taxes further in 2017 after tax revenue rose more than expected last year and so far in 2017. The value-added tax is believed to be one option.

Israel’s economy grew 4% in 2016, and the central bank expects a 3.2% expansion this year. But the bank will issue revised economic forecasts along with the rate decision, and economists expect the estimate for growth to be raised to at least 3.5% and the inflation forecast to be lowered.

At the same time, the central bank’s own economists now expect a 15-basis-point rate increase in the fourth quarter of 2017 and a quarter-point increase in 2018. But economists say rates are unlikely to rise this year, given the benign inflation environment, despite close to full employment and rising wages. (Reuters)