September 12, 2018 / 12:10 PM / a year ago

UPDATE 2-Bank of Israel starts "preparing markets" for rate hikes

* Benchmark rate has been 0.1 percent since February 2015

* Central bank’s economists predict 15 bps hike to 0.25 pct in Q4

* Inflation rate at 1.4 pct, within target of 1-3 pct

* 5 of 6 MPC members voted for no rate move on Aug. 29

* One member wanted a hike but said markets not yet ready (Adds central bank/analyst comments, shekel reaction)

By Steven Scheer

JERUSALEM, Sept 12 (Reuters) - The Bank of Israel on Wednesday signalled it may soon start tightening monetary policy after leaving rates unchanged for 3 1/2 years, now that inflation appears settled within its target range.

In minutes from its Aug. 29 decision, five of the six monetary policy committee (MPC) members voted to keep the benchmark interest rate at 0.1 percent. One member voted for a 15-basis-point increase to 0.25 percent, similar to the past four decisions.

It has stayed at 0.1 percent since February 2015.

At the latest meeting, however, another MPC member wavered, arguing there was room for an increase because current rates were not in line with the state of the economy. But the member voted with the majority since “the possibility for such a step has not yet been internalized by the financial markets,” the minutes said.

Four of the five members who voted for no change last month pointed out that inflation was moving towards entrenchment within the government’s 1 to 3 percent target range.

At the same time, “there is room to begin preparing the markets for the possibility of a measured increase in the interest rate, nonetheless in order to support the entrenchment the interest rate should be kept at its current level for now,” the minutes said.

“They agreed that if the interest rate begins to rise before the inflation rate is entrenched within the target range, it is liable to delay the entrenchment of the inflation environment and ultimately to slow the path of increasing the interest rate.”

Analysts have been split over the timing of a rate increase. Some, including the central bank’s own economists, expect a 15-basis-point increase in the fourth quarter. Others believe an increase won’t come until 2019, when the central bank expects the key rate to reach 0.5 percent.


Bank Leumi Chief Economist Gil Bufman said the minutes seemed to have made it clearer that the MPC will raise rates by the end of the year, with the timing dependent on August inflation data due on Friday.

“They will try to maintain their credibility by moving according to the forecast,” he said, referring to the estimate of the central bank’s economists for a hike by year end.

The next rates decision will be on October 8, which may also be the final meeting for Bank of Israel Governor Karnit Flug, whose term ends in mid-November. A successor has yet to be named. The final decision in 2018 is set for November 26.

Israel’s inflation rate reached 1.4 percent in July.

The committee noted that the possibility of a stronger shekel currency was a risk to keeping inflation within its target range.

The shekel was steady at 3.58 per dollar, although it has gained from a 3.64 rate in late August.

MPC members also downplayed a slowdown in economic growth in the second quarter to an annualised 2 percent rate from 4.8 percent in the prior three months, pointing to several more recent indicators that show the economy “continuing to grow at a solid pace” led by strong consumer spending. (Reporting by Steven Scheer Additional reporting by Ari Rabinovitch Editing by Ken Ferris)

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