Bank of Israel holds main interest rate, raises growth forecasts

The Bank of Israel raised its forecasts for economic growth on Monday after holding its benchmark interest rate steady at 0.1% for the 22nd month in a row.

All 10 economists polled by Reuters had forecast no change by the central bank, which is expected to keep rates steady until late in 2017.

“The economy continues to grow at a solid pace, and the labor market is strong, while the inflation environment remains very low,” Bank of Israel Governor Karnit Flug told a news conference.

Israel has been mired in deflation for more than two years, with the annual rate of price moves holding steady at minus-0.3% in November despite the dissipation of energy-price declines.

In updated estimates, the central bank said it expected annual inflation to reach 1% late next year, moving back to within the government’s annual target range of 1%-3%. It expects a 1.5% inflation rate in 2018.

The Bank of Israel raised its economic growth estimate to 3.5% in 2016 from 2.8% previously, citing upward revisions to growth in the first half and higher-than-expected third-quarter growth of an annualized 3.2%.

It raised its forecast for growth next year 2017 to 3.2% from 3.1% and predicted a 3.1% expansion for 2018, with the economy expected to be more reliant on exports the next two years and less on consumer spending.

The central bank’s own economists predict policy makers will leave the benchmark interest rate at 0.1% until the third quarter of 2017 and then raise it to 0.25% by the end of next year and to 0.5% in 2018.

Flug noted that the central bank would not necessarily follow interest-rate increases by the US Federal Reserve, especially since the European Central Bank is expected to stick to very expansionary policies.

The Bank of Israel’s “policy of foreign-exchange purchases will continue, as necessary, to support the attainment of policy goals,” Flug said.

The central bank’s reserves have reached more than $97 billion and are moving toward the upper end of its $70b.-$110b. target range. Flug noted that the bank would hold back on buying foreign currency should reserves hit $110b.

The shekel was steady at 3.815 per dollar after the rate announcement. It has gained 1.3% since the last rates decision, while appreciating by 2% versus a basket of currencies of major trading partners.

Over the past 12 months, the shekel has appreciated 5.6% against the currency basket.

Starting in 2017, the central bank will decide on interest rates eight times a year from the current 12. (Reuters)