Economy Bank of Israel to keep key rate at 0.25 percent as inflation...

Bank of Israel to keep key rate at 0.25 percent as inflation tame

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Bank of Israel to keep key rate at 0.25 percent as inflation tame

Israel’s central bank is expected to leave short-term interest rates unchanged next week for a third straight meeting given tame inflation and warnings of possible slower economic growth ahead.

All 13 economists in a Reuters poll said policymakers would leave the Bank of Israel’s benchmark rate at 0.25 percent when it announces its decision at 4 p.m. (1300 GMT) on Monday.

After making a surprise increase from 0.1 percent on Nov. 26, the central bank has left the key rate unchanged at its subsequent policy meetings in January and February.

Minutes of the Feb. 25 meeting showed all six rate-setters voting to hold rates, saying they aimed to return inflation to around 2 percent while gradually reducing the extent of monetary accommodation.

Inflation stood at a 1.2 percent annual rate in February, toward the bottom of the government’s 1-3 percent target range. But the central bank believes rising wages as a result of a tight labor market will soon start feeding into inflation.

Prices of non-tradable items — which account for nearly two-thirds of the CPI — rose 2.5 percent in February over the prior 12 months versus a decline of 0.7 percent for tradable goods, according to the Bank of Israel.

With inflation expectations rising, the Bank of Israel could raise rates again as soon as the next decision on May 20, said Alex Zabezhinsky, chief economist at the Meitav Dash brokerage.

“They want to prepare the market,” he said, adding he expects the central bank to hint at a possible hike next month.

But he said there are forces pushing against an increase, such as a stronger shekel.

Israel’s economy grew 3.3 percent last year and the Bank of Israel projects a 3.4 percent pace in 2019 and 3.5 percent next year. The bank’s staff also foresees one more rate increase in 2019 to end the year at 0.5 percent.

Those estimates might be changed next week when the central bank updates its economic forecasts, which it does quarterly, in conjunction with the interest rate decision.

Bank of Israel Governor Amir Yaron said earlier this week that 2018 was a good year for Israel’s economy, with strong consumer spending and a robust labor market.

But in the wake of downgrades to global growth forecasts this year, Yaron warned of “grey clouds on the horizon that should not be ignored.”

“If these (lower) forecasts materialize this may also have an impact on the Israeli economy,” he said.

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