Bank of Israel to keep rates steady as forex intervention preferred- Reuters Poll

01/08/2020 | 10:10am

Israel's central bank will likely hold the line on short- term interest rates for a ninth straight decision this week, after policymakers damped expectations of a near-term cut in favour of foreign exchange intervention.

All 18 economists polled by Reuters said the monetary policy committee (MPC) would keep its benchmark interest rate <ILINR=ECI> at 0.25% when the decision is announced on Thursday at 4 p.m. (1400 GMT), despite inflation remaining near zero.

"Positive growth data and an improvement in the global environment will support the decision to leave the rate unchanged," said Alex Zabezhinsky, chief economist at the Meitav Dash brokerage, referring to an annualised 4% growth rate in the fourth quarter and 3.3% growth for all of 2019.

Most analysts had expected the central bank's first rate reduction since 2015 at the previous decision on Nov. 25 but the MPC opted for no change and moments later, it began buying large amounts of foreign currency to stem the shekel's gains.

Andrew Abir, a voting member of the monetary policy committee and head of the Bank of Israel's market operations department, told Reuters at the time that policymakers believed intervention in the forex market was more suitable than rate cuts to lift inflation and boost Israel's economy. [nL8N2883KK]

Since the Nov. 25 decision, the central bank has bought more than $3.5 billion (2.67 billion pounds) of foreign currency, although dollar-shekel stands at an identical rate of 3.46.

"The bank ... will continue to signal that its next move is down," said Ofer Klein, head of economics and research at Harel Insurance and Finance, adding the central bank will keep buying dollars and cut rates in the first half of 2020 if necessary.

Citing solid economic growth, a tight labour market and inflation expected to move back to its annual 1-3% target in a year's time, four of five MPC members voted for steady rates on Nov. 25 although they held out the prospect of a cut should inflation stay low and the economy weaken, according to minutes of the discussion.

"For the Bank of Israel, inflation is not a trigger to lower interest rates," said Amir Kahanovich, chief economist for the Excellence Investment House. He said more likely, it will take either a drop in unemployment, a sudden market downturn or a sharp weakening of exports.

Along with the rates decision, the Bank of Israel will issue its updated macroeconomic estimates.

In October, the bank's staff forecast 3% economic growth for 2020, an inflation rate of 1.2% and the key rate ending the year at between 0.1% and 0.25%.

By Steven Scheer

© Reuters 2021
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