October 7, 2019 / 1:34 PM / 2 months ago

UPDATE 2-Bank of Israel signals possible rate cut in 2020

* Bank of Israel leaves benchmark rate at 0.25%

* Governor says MPC split on pace of monetary easing

* Cenbank’s staff see key rate at 0.1%-0.25% in 2020 (Adds Bank of Israel governor/analyst comments, shekel reaction)

By Steven Scheer and Ari Rabinovitch

JERUSALEM, Oct 7 (Reuters) - Israel could lower interest rates next year should a global slowdown start to impact the economy and does not rule out a move to negative rates, Bank of Israel Governor Amir Yaron indicated on Monday, driving the shekel currency down.

Yaron was speaking after the central bank held its benchmark interest rate at 0.25% for a seventh straight policy meeting, bucking the easing trend by major global central banks such as the U.S. Federal Reserve and the European Central Bank.

“At this stage, it is not clear if additional accommodative steps will be taken,” Yaron told reporters.

Twelve of 13 economists polled by Reuters had forecast the monetary policy committee (MPC) would refrain from changing rates. One economist had forecast a cut to 0.1%.

MPC members were split over how quickly the central bank should ease policy, Yaron said, especially in reversing a 15 basis point rate hike made last November, and taking into account potential changes in inflation, fiscal data and activity locally and abroad.

“There was a lot of uncertainty in the room, so naturally there was an in-depth discussion on the issue. Some of the people see a need maybe to move more quickly,” Yaron said, stressing the vote was not unanimous.

Asked if the MPC would consider moving to negative rates — something that has never happened in Israel, he said: “No doubt that moving from positive rates to negative rates is not exactly symmetric and smooth. But together with that, I want to say that yes ... it certainly is one of the tools in our toolbox.”

His dovish remarks sent the shekel down 0.9% versus the dollar after appreciating 7% versus the U.S. currency this year.

ADDITIONAL STEPS

At the last policy decision on Aug. 28, the MPC voted 5-0 to hold rates after policymakers in July had said that a rate increase may be possible as early as this year.

But starting in mid-July, the environment changed sharply, with the inflation rate sliding and global central banks stepping up expansionary policies, pushing the Bank of Israel to move in line with its peers.

“If necessary, the committee will take additional steps to make monetary policy even more accommodative” the central bank said in its statement on Monday.

The Bank of Israel’s own economists in an updated forecast projected the key rate would either remain at 0.25% through 2020 or fall to 0.1%. In its prior forecast in July, the bank’s staff foresaw a 0.5% rate by the end of this year and 1% in 2020.

The central bank said the committee was watching the inflation environment in Israel, the monetary policies of major central banks, the slowing in the global economy, and the continued appreciation of the shekel.

“In the coming months the likelihood that interest rates will remain unchanged outweighs the chance that rates will decline,” said Ofer Klein, head of economics and research at Harel Insurance and Finance, citing solid economic growth and rising wages.

Annual inflation edged up to a rate of 0.6% in August — well below the government’s 1%-3% target — from 0.5% in July but it was down from 0.8% in June and 1.5% in May.

The central bank expects inflation to rise to a 1.2% rate in 2020 from 0.6% this year. Yaron downplayed much of the disinflation, saying it was mainly due to volatile items like energy and fresh produce prices.

Israel’s economy is projected to grow 3.1% this year and 3.0% in 2020. This is down from the central bank’s previous forecast of 3.5% in 2020. (Reporting by Steven Scheer and Ari Rabinovitch; Editing by Tova Cohen and Emelia Sithole-Matarise)

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