Karnit Flug
Photo: Bank of Israel
Bank of Israel holds key interest rate, hike seen delayed to 2019
Explaining her final decision as BoI governor, Karnit Flug says ' it is still best to wait in order to verify ... that the inflation environment is not just within the target but is entrenched within it' before changing the benchmark interest rate.
The Bank of Israel left its benchmark interest rate unchanged at 0.1 percent on Monday, citing a belief that inflationary pressures will ease further in coming months and that is likely to shift any rate increase into 2019.
All 13 economists polled by Reuters had forecast no change by the central bank in what was the 57th and final decision for Bank of Israel Governor Karnit Flug, whose five-year term ends next month and who opted not to stand for a second term.
If no replacement is in place by the next meeting on Nov. 26, Flug's deputy, Nadine Baudot-Trajtenberg, will be interim governor. A decision is expected soon, according to a government source.
Karnit Flug (Photo: Bank of Israel)
Speaking at a press conference, Flug said she had hoped the process to choose her replacement would have been quicker, but she said the uncertainty did not influence the MPC's discussion.
Flug, who replaced Stanley Fischer in 2013, said the monetary policy committee (MPC) discussed the conditions necessary to withdraw from the bank's "very accommodative policies."
"The committee reached the conclusion that these conditions are still not fully in place," she said. "At the current time the committee was of the opinion that it is still best to wait in order to verify ... that the inflation environment is not just within the target but is entrenched within it."
Inflation eased to an annual rate of 1.2 percent in August from 1.4 percent in July, remaining within the government's target of 1 to 3 percent a year.
There had been a growing belief that after leaving the key rate unchanged since early 2015, policymakers would start tightening as early as the next decision on Nov. 26—especially since the central bank's own economists had been projecting a 15 basis point hike in the fourth quarter.
But in an updated forecast on Monday, they pushed back the start of rate hikes to 2019, with an expectation of the rate ending at 0.5 percent next year for a total of 40 basis points of monetary tightening.
The delay stems from expectations that "there is likely to be a transitory decline in the inflation rate" to below the lower bound of the target range, the central bank said,
The bank's economists estimated an inflation rate in 2018 of 0.8 percent—down from a prior projection of 1.2 percent—and rising to 1.5 percent in 2019.
Flug referenced the postponement to next year but said the monetary policy committee was not committed to the forecast.
"The committee does not commit in advance to a date for the first interest rate increase," she said. "In any case the (research) department assesses that when the interest rate begins to rise, it will rise moderately, so that the interest rate gap with the United States will be maintained and even increase."
The bank's staff also maintained an economic growth forecast of 3.7 percent for 2018. It foresees 3.6 percent growth in 2019, up from a prior estimate of 3.5 percent.
The shekel weakened to 3.646 per dollar from a rate of 3.625 prior to the rates announcement.
