Boi keeps key interest rate at 0.1%, intends to raise it only in 2018

The Bank of Israel on Thursday held its benchmark interest rate at 0.1%, keeping the rate steady for more than two years. It said it only expects to begin raising the rate in the second quarter of 2018.

The path of inflation and the interest rate are lower than those in the previous forecast mainly because of the shekel’s appreciation, Bank of Israel Governor Karnit Flug told a news conference.

“Inflation is expected to enter the target range only in the second half of 2018, and the first increase in the interest rate is only expected in the second quarter of 2018,” she said.

The central bank’s research department lowered its economic growth forecast for 2016 to 2.8% from 3.2% but raised its 2018 outlook to 3.3% from 3.1%. Israel’s economy grew 4% in 2016. The downward revision in 2017 was due to vehicle purchases that were moved forward to 2016 due to tax changes that took effect in January 2017.

Further changes in vehicle taxation are expected in January 2019, and the central bank estimates this will also lead to purchases being brought forward, increasing the growth rate in 2018.

All 12 economists polled by Reuters had forecast no change in the interest rate by the central bank.

The central bank’s economists now expect inflation of 0.8% in 2017, down from a previous estimate of 1.0% and below the government’s annual target of 1%-3%.

Inflation is expected to rise to 1.5% in 2018.

“The monetary committee intends to maintain the accommodative policy as long as necessary to entrench the inflation environment within the target range,” Flug said.

Israel’s annual inflation rate rose at a faster-than-expected pace in February, its second straight gain after 28 months of falling prices.

The central bank also said there are signs of the housing market cooling off, “but it is too early to conclude that the trend of increases has halted.”