Bank of Israel holds key rate, expects inflation to trend up

The Bank of Israel kept its benchmark interest rate at 0.1% for the 23rd month in a row on Monday, citing an upward trend in inflation and solid economic growth.

Inflation was negative for a third straight year at minus-0.2% in 2016, but the central bank believes inflation will reach 1% by the end of 2017, moving back into the 1%-3% range targeted by the government.

“The low rate of inflation reflects the effect of the [shekel’s] appreciation and possibly structural change and enhanced competition in the economy,” the central bank said in a statement, adding that energy prices were steady.

“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,” it said, noting that long-term inflation expectations are around 2%.

Over the past year, the shekel has strengthened by 6.2% against a basket of currencies of Israel’s main trading partners, mostly because of a 6.7% rise against the euro. The shekel was steady at 3.8 per dollar following the rate announcement.

Israel’s economy grew 3.8% in 2016 on the back of a strong labor market and a recovery in manufacturing exports. But growth is projected to slow to a 3.2% pace this year.

The central bank noted that while global growth estimates were raised, political uncertainty remains high in Europe, Israel’s largest trading partner, while “there is uncertainty regarding expected economic policy” in the United States.

It also said housing prices continue to rise rapidly.

All 11 economists polled by Reuters had forecast no change by the central bank, which is widely expected to keep rates steady until at least late 2017. It reiterated that monetary policy will stay accommodative for a “considerable time.”

The likely path and pace of interest rates is subject to debate, however. The central bank’s economists project 40 basis points of hikes by the end of 2018 to 0.5%. But minutes of the MPC’s December 26 meeting showed one member felt that “is lower than what is reasonable to assume will prevail in actuality.”

The next rate decision will be on February 27. The Bank of Israel will vote on rates eight times this year, having reduced its regular policy meetings from 12 previously.

(Reuters)