August 10, 2015 / 12:36 PM / 4 years ago

UPDATE 1-Israel holds rates, seeing brakes on economy as temporary: minutes

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By Steven Scheer

JERUSALEM, Aug 10 (Reuters) - All five ratesetters on Israel’s central bank voted to leave interest rates unchanged at 0.1 percent for a fifth straight month in July, minutes showed on Monday, with inflation low and the economy weaker than expected.

The policy committee said renewed shekel appreciation and oil prices declines meant inflation, at -0.4 percent in June, could take longer than expected to reach the government’s annual target range of 1-3 percent.

They said “temporary” factors such as labour disruptions have held back growth.

Minutes of the July 27 decision, where policymakers voted 5-0 to leave the benchmark interest rate at 0.1 percent for a fifth straight month, said restrained state spending in absence of a 2015 budget has also slowed growth, as had a nearly 4-month strike at potash maker Israel Chemicals .

Should the government approve the 2015-16 budget later this year as expected, public spending would rise.

Israel’s economy grew a far weaker-than-forecast annualised 2.0 percent in the first quarter, with exports and investment falling, but private spending jumped.

With consumer spending taking over from exports as Israel’s main growth driver, “Such a change ... is liable to negatively impact the increase in productivity in the economy, a development that will slow GDP (gross domestic product) growth, particularly when the economy is near to exhausting the increase in employment,” the central bank’s minutes said.

The second quarter’s preliminary growth estimate will be published next week.

The policy committee said renewed shekel appreciation and oil prices declines could slow the inflation rate’s recovery from -0.4 percent in June to an annual target of 1-3 percent, but an acceleration in wages could counter a deflation trend since last September.

Policymakers “concurred that the current interest rate environment continues to support continued growth and the return of the inflation rate to the target range within a year,” the minutes said.

The central bank projects economic growth of 3 percent this year and 3.7 percent in 2016, while its own economists foresee steady rates through 2015 and a gradual rise to 1.25 percent by the end of next year.

MPC members noted vigorous housing activity and an elevated level of mortgages, and risks to the global economic recovery from developments in China and Greece. They were concerned that Israel’s deficit target of 2.9 percent of GDP next year will lead to a rise in the debt-to-GDP ratio. (Reporting by Steven Scheer; editing by John Stonestreet/Ruth Pitchford)

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