July 10, 2018 / 1:54 PM / a year ago

Israel rates unlikely to rise till inflation 'somewhat' over 1 percent - central banker

JERUSALEM (Reuters) - Israeli interest rates are unlikely to rise until inflation is “somewhat higher” than 1 percent, the deputy central bank chief said on Tuesday, signalling that policymakers would not rush into tightening.

Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg noted that annual inflation was 0.5 percent in May. However, she told a conference that various adjusted price indices and inflation expectations in a year’s time are near or within the government’s 1 to 3 percent annual inflation target range.

Inflation is rising on the heels of gains in global oil prices, prices in tradeable goods and higher local wages.

“For the monetary policy committee (MPC) to be convinced that this rise in inflation is entrenched within the target range, inflation will need to be somewhat higher than the lower bound of the range, and the committee will have to be convinced that the level will be persistent for more than a few months,” Baudot-Trajtenberg said.

On Monday the central bank held its benchmark interest rate at 0.1 percent, unchanged since February 2015, and continued to hold open the possibility of a small increase by the year-end due to the rising inflation and strong economic growth.

The economy grew an annualised 4.5 percent in the first quarter, while the central bank expects growth of 3.7 percent in 2018 and 3.5 percent next year.

Policymakers have repeatedly said inflation must be entrenched within the target range for rates to rise. The central bank’s own economists project a 15 basis point rate increase in the fourth quarter and another quarter-point move in 2019 to bring the benchmark rate to 0.5 percent by the year-end.

However, private economists are split over what the central bank should and will do. Some believe rates should start to rise soon and that the benchmark will go as high as 1 percent next year to prevent a jump in inflation, while others expect a slow and steady pace.

“External factors have turned more favourable for the inflation outlook, allowing the Bank of Israel to tighten sooner,” said Mai Doan, an economist at Bank of America Merrill Lynch. “But (we) still believe that the MPC will stay cautious and not rush into too early or too aggressive hikes.”

She noted that the shekel is strong and a rate rise could push it higher, adding: “The Bank of Israel will not want to intensify that trend amid increasing trade war risks.”

Uncertainty also surrounds who will be the bank’s next chief. Governor Karnit Flug decided last week not to stand for a second term when her first term ends on Nov. 12.

Flug will still be chief for the next two rate meetings in August and October. She may stay on until a new governor is in place, or Baudot-Trajtenberg could become acting head.

On Monday, Flug said inflation did not need to get to 2 percent, the target’s midpoint, to be considered entrenched.

“The committee will want to be certain, to the extent possible, that the return of inflation to the target range will not last for only a few months,” Flug said. “We will therefore need to wait and see how the inflation environment develops before we will be able to establish that it is entrenched within the target.”

Reporting by Steven Scheer; editing by David Stamp

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