(Recasts, adds details, central bank comments)
By Steven Scheer
JERUSALEM Oct 10 Israeli policymakers kept
short-term interest rates unchanged last month partly on a
belief that inflation could rise faster than what is currently
expected by investors.
All four rate setters on the Bank of Israel's monetary
policy committee (MPC) voted to keep the benchmark interest rate
at 0.1 percent for a 19th consecutive month on Sept.
26, minutes of the discussions showed on Monday.
They reiterated that Israel's benign inflation environment -
the country has been in deflation for two years - derives from
low inflation abroad, mainly a decline in oil and other
commodity prices, as well as tax reductions.
Israel's annual inflation rate stood at -0.7 percent in
September, well below a government target range of 1 to 3
percent a year.
But policymakers believe inflation is on its way back to
target given rising wages that are expected to "act to increase
unit labor cost, and to develop into an increase in the domestic
inflation rate", the minutes said, assuming that commodities
prices will not fall further.
"One of the committee members noted that this process is
likely to develop at a more rapid rate than the rate
implied in capital market prices and in the forecasts of private
entities," it added.
According to the Statistics Bureau, the average wage of
Israeli workers rose to 10,021 shekels ($2,639) a month in July.
compared with 9,476 shekels just two months earlier.
Prior to the rates decision, the central bank noted that
based on bond yields, the inflation rate was expected to reach
0.6 percent in a year's time, while private economists projected
0.7 percent. The Bank of Israel's own economists forecast a 1
percent rate at the end of the third quarter of 2017.
Stronger-than-expected economic growth in the second quarter
also kept rates on hold last month. The economy grew an
annualised 4.0 percent in the April-June period, revised up from
a preliminary estimate of 3.7 percent. That prompted the central
bank to raise its 2016 economic growth estimate to 2.8 percent
from 2.4 percent. It sees 3.1 percent growth in 2017.
In addition to strong consumer spending, exports rebounded
in the second quarter. Spending, the minutes said, is being
driven by labour income and not by savings or higher credit.
The monetary policy committee "agreed that the current
interest rate level is in line with the low inflation
environment and with domestic activity - taking into account the
global situation, both in terms of economic activity and in
terms of monetary developments in major economies - and that it
supports the return of inflation to its target range".
($1 = 3.7970 shekels)
(Reporting by Steven Scheer; editing by Mark Heinrich)