March 31, 2015 / 11:30 AM / 5 years ago

UPDATE 1-Bank of Israel: ready to use unconventional policy if needed

(Adds quotes, details)

By Ari Rabinovitch

JERUSALEM, March 31 (Reuters) - Bank of Israel Governor Karnit Flug said on Tuesday that given the state of the world economy and uncertainty about future developments, the bank is prepared to use new tools in setting monetary policy.

The central bank has said in recent weeks it was studying steps taken by other central banks, such as quantitative easing, and is willing to implement them, but Tuesday’s comments were the most forceful yet.

“We are not eager to use them, because of course unconventional policy tools have adverse effects, but if conditions arise that there is a need to use them, we will not hesitate to do so,” Flug said at a briefing with reporters.

The Bank of Israel last week held its benchmark interest rate at 0.1 percent, citing a weaker shekel since a surprise rate reduction a month earlier and a belief that inflation will move back above 1 percent next year.

Its own economists believe the key rate will stay at 0.1 percent the rest of 2015, though some analysts say the central bank may cut its rate to zero or even announce a plan for quantitative easing should the shekel start to strengthen.

Flug also weighed in for the first time on a recent decision by Israel’s competition regulator that two big oil and gas companies operating off the Israeli coast may constitute a monopoly and will need to sell some of their assets.

The natural gas sector, Flug said, “demands regulation and the issue of competition is certainly worrisome. But I think there needs to be an overall view here, and if as a result of certain decisions there will be a significant delay in the development of the deposits, I think that damage will also be big and a balance needs to be found.”

Israel’s Delek Group and Texas-based Noble Energy halted development plans for the huge Leviathan field, which will turn Israel into an energy exporter when it goes online.

The government has since been scrambling to find a solution that will open up the market to competition without putting off new investors wary of the regulatory uncertainty.

Flug said the state has not been spending enough on infrastructure projects or public service, and the country’s new government, which has yet to be formed following a March 17 election, has options for finding new revenue when deciding on its budget.

“There is certainly room to increase (tax) revenue by reducing the number of unjustified exemptions,” she said. (Reporting by Ari Rabinovitch; Editing by Tova Cohen, Larry King)

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