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UPDATE 1-Israel central bank holds key rate, raises 2017 growth estimate
July 10, 2017 / 2:37 PM / 4 months ago

UPDATE 1-Israel central bank holds key rate, raises 2017 growth estimate

(Adds details, new economic estimates, central bank governor quotes)

By Ari Rabinovitch and Steven Scheer

JERUSALEM, July 10 (Reuters) - The Bank of Israel left its benchmark interest rate at 0.1 percent for a 27th time since February 2015 on Monday, citing low inflation and solid economic growth and expressing no rush to start raising interest rates.

“The Monetary (Policy) Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range,” Bank of Israel Governor Karnit Flug told reporters after the rates decision.

Prices had declined for 28 months through the end of 2016, with the inflation rate moving to 0.8 percent in May - below the government’s annual target range of 1 to 3 percent.

Flug noted that a strong shekel, a halt in higher energy prices and Israeli government steps to reduce the cost of living are expected to push the inflation rate lower in coming months before returning to the target range.

The central bank forecasts an inflation rate of 0.5 percent this year, rising to 1.5 percent in 2018.

In an updated forecast on Monday, the bank’s own economists projected the key interest rate would remain unchanged through the first quarter of 2018, rise to 0.25 percent in the second quarter and rise again in the fourth quarter to bring the rate to 0.5 percent.

With exports expected to improve as global trade strengthens, the central bank raised its economic growth estimate for 2017 to 3.4 percent from a previous 2.8 percent and left its 2018 forecast unchanged at 3.3 percent. Growth was 4 percent in 2016.

Flug reiterated her belief that the shekel was over-appreciated and said the bank would continue to intervene if necessary.

“The shekel is over-valued, a result of the very accommodative policy that some central banks are adopting,” Flug said.

Without the Bank of Israel’s intervention, in which it bought some $3 billion the past three months, the shekel would be even more over-valued, she said.

The shekel is hovering at a three-year high versus the dollar at 3.5470 and is at a 17-year high versus a basket of currencies from Israel’s largest trading partners.

All 10 economists polled by Reuters had forecast no change in rates by the central bank.

Israel’s economy grew an annualised 1.2 percent in the first quarter, its slowest pace in almost two years with changes to the way cars are taxed distorting the numbers.

“After a long period in which private consumption drove growth, there are increasing signs at this time there is a return to more balanced growth in the economy, with both exports and investments contributing,” Flug said.

Reporting by Steven Scheer and Ari Rabinovitch, editing by Larry King

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