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UPDATE 1-Israel MPC member sees higher rates than expected - minutes
January 9, 2017 / 12:59 PM / 9 months ago

UPDATE 1-Israel MPC member sees higher rates than expected - minutes

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By Steven Scheer

JERUSALEM, Jan 9 (Reuters) - One member of the Bank of Israel’s monetary policy committee (MPC) believes interest rates will rise faster than the central bank’s forecast, according to minutes of the Dec. 26 rates decision issued on Monday.

The minutes, which were less dovish than past months, showed all four rate setters voted to keep the benchmark interest rate at 0.1 percent for a 22nd straight month and said monetary policy will remain accommodative for a considerable time.

But one member seemingly took issue with the central bank’s updated staff forecast, also issued on Dec. 26, that projects a rate level of 0.25 percent by the end of this year and 0.5 percent at the end of 2018. That would indicate an increase of just 40 basis points in the coming two years.

This MPC member, the minutes said, believes “the interest rate path indicated by the research department forecast that was presented to the committee is lower than what is reasonable to assume will prevail in actuality.”

“In his assessment, in light of the situation in the labour market and real economic activity in Israel, which indicates that the low inflation rate is not a result of weak demand, the gap between the forecast for the expected interest rates in the U.S. and Israel is too wide, despite the assessment that the interest rate in Europe will remain negative,” it added.

The Federal Reserve has started to tighten policy and is forecast to raise U.S. interest rates three more times in 2017.

In holding rates steady last month, Israeli policymakers cited continued deflation, where the annual inflation rate held at -0.3 percent in November, despite the weakening of the effects of “initiated price reductions” and of declines in energy prices.

They noted that while it may take longer to reach the government’s 1-3 percent annual inflation target in the short term, medium and long-term inflation expectations remained anchored within the target range.

One MPC member said that the decline in prices in recent years is an indication of a process of price levels for some products that stems from social protests in 2011.

At the same time, Israel’s economy bounced back in 2016 and posted a 3.8 percent provisional growth rate, after a 2.5 percent pace the prior year, buoyed by strong consumer spending that the central bank believes is due to incomes rather than higher household leverage.

The central bank expects slower economic growth of 3.2 percent in 2017 and 3.1 percent in 2018.

The MPC stressed that Israel’s labour market is near to full employment.

It also cautioned over goods exports given an appreciation of the shekel versus European currencies. The shekel recently hit a 15-year peak against the euro.

The central bank will move to eight decisions per year in starting in 2017 from a previous 12, with the next decision on Jan. 23.

Reporting by Steven Scheer; Editing by Ari Rabinovitch and Tom Heneghan

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