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Israel central bank chief: No need to rush to raise rates while inflation contained

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The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun

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  • Central bank held short term rates Monday for 13th straight time
  • Israel inflation rate at 2.3% in October, within 1-3% target
  • Governor: Economy expected to grow at least 6% in 2021
  • No plans to pre-announce forex intervention
  • Israel shekel at 26-year high versus dollar

JERUSALEM, Nov 23 (Reuters) - The Bank of Israel is in no rush to raise interest rates as inflation remains under control, and will not pre-announce how much foreign currency it might buy to curb shekel appreciation, Governor Amir Yaron told Reuters.

On Monday, the bank held its benchmark interest rate (ILINR=ECI) at 0.1% for a 13th meeting, citing expectations inflation will ease in the coming year even as the economy rebounds from the pandemic.

Inflation dipped to 2.3% in October from September's eight-year high of 2.5% despite bottlenecks and supply chain difficulties that are affecting Israel like other countries.

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"We still have a very accommodative monetary policy," Yaron said in an interview, adding that the central bank had "more degrees of freedom" to maintain that stance as annual inflation is expected to stay within its 1-3% target range.

Describing inflation as an "inverted U", Yaron said economic conditions did not point to a sustained rise, so "we don't see a need to rush in anywhere in terms of our monetary action".

Analysts are split over when rates will rise, with some expecting a hike next year and others not until 2023.

Inflation, which only turned positive in March, has stabilised partly due to a stronger shekel, which makes imported goods cheaper. Yaron rejected the idea that the central bank was allowing the shekel to appreciate to bring down inflation.

He said Israel was in a different position to countries like the Czech Republic which have already hiked rates, noting: "Their inflation is quite markedly ahead of their targets. And that is a significant difference from where we are."


Israel reopened its economy in March after a world-leading vaccine rollout and the central bank last month estimated economic growth of 7% in 2021, although Yaron said it could be lower after a weaker third quarter.

"We haven't done the complete analysis but you're still in the 6%-plus," he said. "We are seeing lots of signs for a strong economy."

Growth should remain robust "as long as there are no variants completely resistant to vaccination".

The labour market remains a downside even though the broadest measure of unemployment has fallen to 7%, and Yaron called on the government to provide more training for people whose jobs have been lost to structural change.

Israel's economy has shifted over time from manufacturing to services, led by the booming technology sector.

"We're not trying to change the trend," Yaron said of the strong shekel. "We're trying to allow the economy to adjust to the changes."

He said the central bank would continue to intervene occasionally in markets to prevent big movements in the shekel, although there "there is no need to announce a specific figure".

"We are in what I would call back to a more discretionary approach," Yaron said, after the bank bought $30 billion of foreign currency this year under a plan outlined in January.

The shekel has been the best-performing emerging currency during the pandemic, having risen around 10% since 2020. It hit a 26-year high of 3.04 per dollar last week.

That reflects tech sector inflows, Israel's large current account surplus and stock market gains that have forced pension funds and other institutions to cap their forex exposures, but has angered exporters.

The shekel weakened to 3.13 per dollar from 3.11 after Yaron's comments.

Yaron said shekel gains were based on economic fundamentals but that the central bank wanted to ensure adjustments were gradual so that companies do not make "irreversible decisions just because of too sharp movements".

He welcomed the passing of a 2021-2022 budget this month, the first since 2019, saying it included long-due reforms and did not impose fiscal constraints. But the government must address a high structural deficit in 2023 and 2024.

Yaron said Israel's sovereign wealth fund should begin operating in 2022, while the central bank may make recommendations on inflation-targeting.

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Reporting by Steven Scheer; Editing by Catherine Evans

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