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July 08, 2018

Bank of Israel to again hold rates as governor to step down

Bank of Israel to again hold rates as governor to step down
Bank of Israel to again hold rates as governor to step down

By Steven Scheer

JERUSALEM (Reuters) – The Bank of Israel is expected to hold short-term interest rates unchanged again this week, a Reuters poll showed, in what will be one Governor Karnit Flug’s last rate decisions.

All 13 economists in a Reuters poll said the central bank would keep its benchmark rate at 0.1 percent — where it has stood since February 2015 — when the decision is announced at 4 p.m. (1300 GMT) on Monday.

In a surprise statement on Friday, the Bank of Israel said Flug would not stand for a second five-year term when her tenure ends in November.

That means Flug will chair two more meetings after Monday, in August and October.

It also raises monetary policy uncertainty over a 15 basis point rate increase in the fourth quarter currently expected by the central bank’s own economists.

In 2019, the bank projects one quarter-point hike to 0.5 percent.

Along with the rates announcement, the bank will update its macro forecasts, while Flug will hold her quarterly news conference at 1315 GMT.

Jonathan Katz, chief economist at Leader Capital Markets, believes that despite rising inflation expectations, the central bank will push back its rate increase to early 2019.

“It’s too early to hike,” he said, noting the shekel is strong at a 3.63 rate per dollar. “Any message that they will keep a rate hike in the fourth quarter and if they add a hike in 2019, that will cause a ripple” and send the shekel higher.

Flug and other central bank officials have repeatedly said there would not be a hike until inflation is entrenched in the government’s annual target of 1 to 3 percent.

Israel’s inflation rate stood at 0.5 percent in May, while bond market yields indicate a 0.9 percent rate in a year’s time.

Israel Discount Bank chief economist Nira Shamir said policymakers may have missed a window of opportunity to establish a process of rate hikes.

The central bank “should aspire to as many rate hikes as possible already in 2019,” she said, forecasting a rate increase to 0.25 percent in the fourth quarter and three more quarter-point hikes next year to reach 1 percent.

“In the past two days we have seen a rise in government bond yields … and it is reasonable to assume that the Bank of Israel will update its interest rate forecast” on Monday, she added.

In May, five of the six monetary policy committee members voted to keep rates steady for the 34th time in succession, although one called for a rate increase.

Israel’s economy remains strong, growing an annualized 4.5 percent in the first quarter. Growth is expected at about 3.5 percent in 2018.

Since the last decision on May 28, the shekel has weakened to 3.63 per dollar from 3.57. It is down 4 percent this year.

Finance Minister Moshe Kahlon said earlier this year he would start looking for candidates for governor and that Flug — who replaced previous governor Stanley Fischer in 2013 after serving as Fischer’s deputy — would be considered, even though the two have had disagreements over Kahlon’s housing and tax policies.

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