July 22, 2019 / 11:37 AM / 2 months ago

UPDATE 1-4 of 5 Bank of Israel MPC members voted to hold key rate at 0.25% -minutes

(Adds Bank of Israel comments)

By Steven Scheer

JERUSALEM, July 22 (Reuters) - Four of the five rate setters at the Bank of Israel voted to keep the benchmark interest rate at 0.25 percent on July 8 but policymakers believe a rate hike is still possible this year, minutes of the discussions showed on Monday.

For the third time in a row, one member of the monetary policy committee (MPC) voted for a quarter-point increase to 0.50 percent, the central bank said.

“Even though the inflation environment has been stable for several months within the inflation target range, there is currently particularly high uncertainty regarding economic developments in Israel and abroad, and therefore the interest rate should remain unchanged at this time,” the central bank said, noting economic growth remained solid.

But MPC members agreed that in the coming months “conditions could ripen for increasing the interest rate by 0.25 percentage points”, contingent on developments regarding the inflation environment and economic developments in Israel and abroad.

In addition to leaving rates steady on July 8, Bank of Israel economists reiterated a projection of a quarter-point increase to 0.5% in the third quarter and two more hikes in 2020 to bring the rate to 1% by the end of next year, in contrast to talk of easing policy in the United States and Europe.

Bank of Israel Governor Amir Yaron said at the time that it might be necessary to raise rates in one of the upcoming meetings, stressing that while developments abroad influenced Israel “we do not need to be one-to-one to what is happening in the big blocs”.

Much hinges on inflation developments.

Annual inflation slid to an annual rate of 0.8% in June from 1.5% in May, well below a Reuters estimate of 1.2% and falling below the government’s inflation target of 1-3%.

The MPC blamed some of the easing in inflation on a stronger shekel. “The Committee members noted that the appreciation is the main factor delaying the continued increase in the inflation rate toward the midpoint of the target, and thus could have an impact on Bank of Israel policy,” the minutes said.

Policymakers also expressed concern at a budget deficit that has reached an annual 3.9% of GDP, saying they expect fiscal uncertainty to last for some time given political uncertainty and steps the government could take to deal with the deficit.

The MPC member who voted for a rate hike argued that the current rate is not in line with the state of the economy “compared with economic conditions and the interest rates prevailing in several other economies”. (Additional reporting by Ari Rabinovitch; Editing by Catherine Evans)

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