August 28, 2019 / 1:25 PM / 2 months ago

UPDATE 2-Bank of Israel holds rates, sees no hikes for "extended period"

(Adds details, quotes, shekel reaction)

By Steven Scheer

JERUSALEM, Aug 28 (Reuters) - The Bank of Israel held its benchmark interest rate at 0.25% on Wednesday for the sixth straight meeting, citing a downward shift in inflation, and removed the prospect of a rate increase for the time being.

All 12 economists polled by Reuters had forecast rates would remain unchanged again.

Annual inflation slipped to a rate of 0.5% in July — well below the government’s 1-3% target — from 0.8% in June and 1.5% in May. “The monetary (policy) committee’s assessment is that in view of the turnaround in the inflation environment in Israel and in the monetary policies of major central banks, the slowing in the global economy, and the continued appreciation of the shekel, the interest rate will not be increased for an extended period,” the central bank said in a statement.

The bank added that if necessary, the committee will take additional steps toward making monetary policy even more accommodative to “support a process at the end of which inflation will stabilize around the midpoint of the target range, and to support economic activity”.

While it did not specify the steps it would take, they likely include cuts that could result in negative rates and intervention in the foreign exchange market.

The shekel, which had strengthened close to 9% versus a basket of currencies of main trading partners and more than 6% against the dollar so far in 2019, weakened after the rates decision.

It stood at 3.5310 per dollar at 1340 GMT, compared with 3.52 prior to the rates decision and Tuesday’s close of 3.5158.

“If the appreciation persists, it will be harder for a more extended period to return inflation to the target range,” the central bank said.

While most economists expect steady policy well into 2020, some have started to predict possible rate cuts as early as the fourth quarter of this year.

The new statement from the Bank of Israel was a reversal from one in previous decisions that said the path of rate hikes would be “gradual and cautious.” In a surprise move last November, the bank raised the rate from 0.1%.

Early last month, Governor Amir Yaron had held out the prospect of a rate hike in the coming months but later said rates would not rise for an extended period given a stronger shekel, the inflation drop and the Federal Reserve’s rate reduction.

The central bank’s own staff project a rate hike this year and two more in 2020 to bring the key rate to 1%. But these estimates will likely be altered at the next rates decision on Oct. 7, when new macro forecasts will be published.

“We still think the MPC has a general hawkish bias, and Yaron will find it difficult to loosen further as long as growth indicators appear fairly strong,” said Leader Capital Markets Chief Economist Jonathan Katz.

The MPC said the economy was growing close to its potential and was not being hurt by negative global sentiment, but it said trade wars posed risks to the global economy and noted that further monetary accommodation is likely globally. (Additional reporting by Ari Rabinovitch; Editing by Tova Cohen)

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