Israel’s central bank left its key interest rate steady at 0.25 percent, as expected, and confirmed its guidance that it “will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it” to ensure inflation stabilizes around its the midpoint of its target range.
The Bank of Israel (BOI), which has maintained its rate since raising it in November 2018 for the first time since 2011, added its monetary policy committee “is taking additional steps as necessary to make monetary policy more accommodative,” a reference to its intervention in foreign exchange markets to weaken the strong shekel.
Israel’s shekel rose in 2019, prompting expectations last year the central bank would cut rates to stem further gains.
Instead, BOI in November opted to intervene in the foreign exchange markets to weaken the shekel and boost inflation and has bought more than $3.5 billion of foreign currency since Nov. 25, 2019.
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In response to today’s policy decision, the shekel weakened 0.3 percent to 3.47 to the U.S. dollar after rising 8.3 percent in terms of an effective exchange rate in 2019, “a development that continues to make it difficult to return inflation to the target range,” BOI said.
Underlining the BOI’s dovish policy stance, its research staff lowered its forecasts for economic growth and inflation in 2020, and forecast the key interest rate would be between 0.25 percent and 0.1 percent in the coming year before gradually rising toward the end of 2021.
Israel’s inflation rate dropped to a lower-than-expected 0.3 percent in November from 0.4 percent in October and BOI lowered its forecast for inflation to be 1.0 percent in 2020, down from its previous forecast of 1.2 percent but up from 0.4 percent in 2019.
BOI targets inflation of 1.0 to 3.0 percent.
Economic activity in Israel last year was better than BOI had expected, with gross domestic product up an estimated 3.3 percent, on strong public and private consumption.
BOI lowered its forecast for 2020 growth to 2.9 percent from October’s forecast of 3.0 percent, and forecast 3.2 percent growth in 2021.
BOI said the government’s interim budget is expected to have a “markedly contractionary effect” in the first half of this year and there is continuing uncertainty about budgets after that.
“Global economic activity continues to slow, but its seems that the risks of a significant deterioration have declined in view of progress in the trade negotiations between the US and China and the results of the UK elections,” BOI said, adding additional monetary easing by major central banks “has reached its limits at this stage.”
The Bank of Israel issued the following press release:
“The Monetary Committee decides on January 9, 2020 to keep the interest rate unchanged at 0.25 percent
- The inflation environment remains low. The November CPI was lower than expected, and inflation over the past 12 months is 0.3 percent. Inflation excluding energy and fruits and vegetables indicates a lower basic inflation rate than in previous months. In the coming months, inflation is expected to stay low, but most one-year expectations and forecasts remained near the lower bound of the target range.
- Since the previous interest rate decision, the shekel has been relatively stable against the dollar, while most other currencies strengthened against the dollar. However, during 2019, the shekel strengthened by 8.3 percent in terms of the nominal effective exchange rate, a development that continues to make it difficult to return inflation to the target range.
- Most indicators of economic activity point to continued solid growth in the fourth quarter, and the labor market remains tight. However, the interim budget is expected to have a markedly contractionary effect in the first half of 2020, and there is continuing uncertainty regarding budgetary policy thereafter. According to the Research Department’s staff forecast, growth is expected to slow somewhat in 2020.
- Global economic activity continues to slow, but it seems that the risks of a significant deterioration have declined in view of progress in the trade negotiations between the US and China and the results of the UK elections. Inflation remains low, but it appears that the process of enhanced monetary accommodation by the major central banks has reached its limit at this stage.