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All eyes on QE as Bank of Israel expected to hold interest rate

JERUSALEM (Reuters) - The Bank of Israel is expected to leave short-term interest rates unchanged this week for its 10th straight policy meeting, as debate continues over inflation gains.

FILE PHOTO: An Israeli shekel note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

All 16 economists polled by Reuters believe the monetary policy committee (MPC) will keep the benchmark rate at an all-time low of 0.1% when the decision is announced on Monday at 4 p.m. (1300 GMT).

With the rate expected to remain on hold for at least another year and some projecting 2023, analysts are looking to the central bank for decisions on extending government bond purchases and to keep buying foreign currency to add to its record level of reserves in a bid to contain the strong shekel.

In addition to the rates announcement, the Bank of Israel will simultaneously issue updates to its 2021 and 2022 macro forecasts and governor Amir Yaron will hold his quarterly news conference at 1315 GMT.

At the outset of the COVID-19 pandemic, in response to spiking bond yields, the central bank began a quantitative easing (QE) programme in March 2020, saying it would buy as much as 50 billion shekels ($15 billion) of government bonds. In October, the level was raised to 85 billion.

As of May, the bank has bought 65.3 billion shekels worth of government bonds. At a pace of 3-4 billion shekels a month, it may have come close to 70 billion in June (data will be issued on July 7) and could hit 80 billion around September.

Leader Capital Markets chief economist Jonathan Katz believes Yaron will likely signal the programme will not be renewed - a scenario he says is built into the market.

Others see Yaron expanding the programme.

Alex Zabezhinsky, chief economist at the Meitav Dash brokerage, said it may be broadened by another 15-30 billion shekels, mainly due to timing.

The central bank, he said, would probably want to announce any decision during one of its planned press conferences, which would be on Monday or in October, when the total bonds purchased will be close to the threshold and it will be short notice.

“If he wishes ... to be able to explain his decision at a press conference, the Bank of Israel may already this week announce the continuation or termination of the programme.”

Similarly, the Bank of Israel bought $22 billion of forex over the first five months of 2021 as part of a planned $30 billion this year to contain the shekel’s strength. Yaron has said purchases could exceed $30 billion if needed.

Israel’s inflation rate jumped to 1.5% in May - near the midpoint of the government’s 1-3% annual target range - from 0.8% in April, but policymakers have said it was difficult to determine whether the rise in inflation is transitory.

In April, the central bank forecast 6.3% economic growth this year after widespread COVID vaccinations among adults. Infection rates have started to rise as the Delta variant takes hold.

($1 = 3.2674 shekels)

Reporting by Steven Scheer; Editing by Ari Rabinovitch and Barbara Lewis

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