Bank of Israel seen leaving key rate at 1 percent next week

Thu Oct 24, 2013 6:39am EDT

Related Topics

* Rates decision expected Monday at 1530 GMT

* Cabinet to vote on Flug nomination as central bank chief on Sunday

By Steven Scheer

JERUSALEM, Oct 24 (Reuters) - The Bank of Israel is expected to leave short-term interest rates unchanged next week in what could be Karnit Flug's first decision as the country's central bank governor.

All 10 economists in a poll by Reuters expected no rate change when the decision is announced on Monday at 1530 GMT. Most foresaw no more moves the rest of the year.

After a series of snags and missteps in which two prior appointees dropped out, Flug earlier this week was nominated to the post nearly four months after Stanley Fischer stepped down at the end of June.

As deputy governor for 5-1/2 years, Flug has been acting governor since July and under her leadership the monetary policy council (MPC) defied expectations with a quarter-point cut last month that pushed the benchmark rate down to 1 percent.

The MPC voted 3-2 in favour of the cut, the first such move since May and aimed at boosting exports by trying to halt an appreciation of the shekel, which is at a more than two year high versus the dollar.

According to minutes of the discussions, policymakers were concerned about a decline in exports and slower growth in private consumption. They also cited an expected moderation in government spending in 2014, when additional tax increases will also come into effect.

Financial markets have welcomed the nomination of Flug, whose appointment will be brought to a cabinet vote on Sunday. She is widely expected to be approved and then needs to be formally installed by Israel's president.

"This appointment will help achieve policy continuity and remove various uncertainties in monetary policy making," said Tevfik Aksoy, an economist at Morgan Stanley, noting that Flug was largely groomed for the position by Fischer.

Flug's main challenge will be to keep the shekel from appreciating further. Partly due to the start of natural gas production that has improved Israel's balance of payments, the shekel has gained 7 percent against the dollar so far in 2013.

Interest rates are already very low and the Bank of Israel has bought tens of billions of dollars the past five years, pushing foreign currency reserves to a record $80 billion. With housing prices continuing to rise, lowering rates again is seen by some as threatening a bubble.

Analysts, though, expect the MPC to remain dovish.

"We expect Flug and the MPC to continue to focus on boosting Israel's benign exports by supporting a weaker shekel while at the same time addressing the upward pressure on housing prices by macro-prudential measures," said Nimrod Mevorach, economist at Credit Suisse, referring to steps taken to limit mortgages.

Israel's economy is expected to grow 3.6 percent in 2013 and 3.4 percent in 2014, according to the Bank of Israel. Inflation is tame at an annual rate of 1.3 percent in September.

Flug has named Nathan Sussman, the head of research at the Bank of Israel, to the MPC starting in November. He will replace Barry Topf, senior adviser to the governor, who is stepping down at the end of October.

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