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The Bank of Israel extended a pause in interest rates even as it conceded political uncertainty risks damaging the economy, opting to keep in reserve its minimal room for maneuver as major central banks suspend monetary easing.
After voting narrowly in favor of a hold in October, the monetary committee said on Monday that its key rate will stay at 0.25%, where it’s been since a surprise hike a year ago. Analysts surveyed by Bloomberg were split, with a slim majority predicting a cut and the rest seeing no change.
Repeating its guidance from October, the Bank of Israel said in a statement that “it will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it” to eventually bring inflation near the 2% midpoint of its target range and help economic growth.
By holding off on a cut, policy makers are signaling that for now they are more likely to prefer other tools to push back against currency appreciation and revive inflation -- possibly by intervening in the foreign-exchange market. The shekel surged after the decision, before paring gains and trading little changed against the dollar.
The Bank of Israel said it “is taking additional steps as necessary” to make policy more accommodative, a slight change from its previous wording, when the bank said it “will take” further measures. Policy makers last month bought $314 million of foreign exchange after largely staying out of the currency market for most of the year.
In Deadlock
Israel’s economy will have to make do without monetary stimulus at a time of unprecedented political paralysis after two inconclusive ballots in April and September. The country is close to declaring a third election in less than a year after Prime Minister Benjamin Netanyahu and former military chief Benny Gantz both failed to form a governing coalition.
The logjam has kept Israel from passing a new budget as its deficit swells. While fiscal policy “has so far been expansionary,” it could become a drag on growth if the government has to function without a new budget “for a prolonged period,” the central bank said on Monday.
“The continuing uncertainty regarding the political situation in Israel may leave its mark on economic activity,” it said.
With the central bank reluctant to deliver Israel’s first rate cut since 2015, attention is shifting to where it might turn next to hold back the shekel. After blaming currency strength for keeping inflation stuck below the target range, policy makers last month conducted their most significant intervention in the currency market in more than a year.
‘More Aggressive’
“The decision to leave rates unchanged can only be understood if the bank begins to intervene in a more aggressive way in the foreign currency market,” said Rafi Gozlan, chief economist for Israel Brokerage and Investments in Tel Aviv.
Third-quarter economic data complicated the outlook for the central bank. Even as consumption fueled a surprise increase of 4.1% in gross domestic product, changes in inventories had an outsized effect, while investment and exports dropped.
Meanwhile, the shekel has appreciated every quarter against the dollar this year thanks to the growing economy, its current-account surplus, foreign investment and an expected increase in natural gas production. It’s the fourth-best performer globally against the dollar so far in 2019.
Governor Amir Yaron took the reins last December, a month after the central bank surprised by raising rates for the first time since 2011 under an interim chief. But a longer tightening cycle never materialized, derailed by the currency rally and a dovish turn by the world’s major central banks as the global outlook deteriorated.
Intent on pushing prices to around the middle of the 1% to 3% target range, Yaron instead had to issue an unusual statement that rates would stay on hold for a long time after inflation plummeted out of the range five months ago.
Since then, the shekel has continued to appreciate while consumer prices last month rose just 0.4% from a year earlier. The central bank’s next decision on Jan. 9 will be followed by a news briefing with Yaron.
“It seems that the sole reason that led the monetary committee to leave interest rates at the current level is a fear of losing the little ammunition that it still has,” Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv, said in a note. “Intervention is not really achieving its goals. In light of this we assess this Bank of Israel decision is not more than kicking a can down the road.”
