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UPDATE 1-Israel central bank: negative rates, bond purchases not needed
February 22, 2017 / 12:29 PM / 7 months ago

UPDATE 1-Israel central bank: negative rates, bond purchases not needed

(Adds details, comments)

By Steven Scheer

JERUSALEM, Feb 22 (Reuters) - Israeli policymakers have stopped considering a possible move to negative interest rates or using other unconventional monetary tools given a rebound in economic growth and higher inflation, the Bank of Israel said on Wednesday.

The central bank’s monetary policy committee (MPC) has kept its benchmark interest rate unchanged at 0.1 percent for two years, although it has said policy would remain accommodative for a considerable time.

“It is no longer needed to examine the use of various monetary tools,” its report for the second half of 2016 said.

The MPC “believes that conditions have not come about requiring the use of unconventional tools such as bond purchases or negative monetary interest, in view of the unexpectedly strong growth data, strength of the labour market, increase in medium-term inflation expectations, and long-term expectations that remained in the middle of the (1-3 percent) target range.”

The bank next decides on interest rates on Monday.

Its own economists forecast steady policy through the third quarter of 2017 and a 15-basis-point rise in the fourth quarter, followed by another quarter-point increase to 0.5 percent in 2018.

Rather than reduce interest rates, the MPC opted to buy $2.6 billion of foreign currency in the second half of 2016, $900 million of which was bought under a programme that aims to offset the impact of natural gas production on the exchange rate.

“The (MPC) preferred to make use of foreign exchange market intervention, rather than a further reduction in the interest rate, because of the risks inherent in a negative interest rate policy,” the central bank said, reiterating that the strong shekel continues to weigh on exports.

Israel’s economy grew 4 percent in 2016 but is projected to slow to 3.2 percent this year.

The annual inflation rate turned positive in January - rising 0.1 percent - after 28 months of falling prices. The central bank foresees a 1-percent inflation rate by the end of 2017.

The shekel is at a more than two-year high against the dollar at 3.71, and at a 15-year peak versus the euro.

“Various equilibrium exchange-rate models indicate that the shekel is overvalued,” the central bank said. (Editing by Tova Cohen and Louise Ireland)

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