Bank of Israel Holds Rate After Surprising Growth Slowdown

The Bank of Israel held its benchmark interest rate at a record low as slower-than-expected economic growth in the first quarter bolstered expectations the central bank will keep policy steady for the rest of the year.

The BOI left its benchmark interest rate at 0.1 percent, as predicted by all 21 economists surveyed by Bloomberg. After the decision, the shekel was trading 0.3% higher at 3.5672 to the dollar at 4:09 p.m. in Tel Aviv.

“It’s the same general statement, but there’s a bit more optimism about the world economy and the circumstances facing the Israeli economy,” said Rafael Gozlan, chief economist at Israel Brokerage & Investments Ltd. in Tel Aviv. “The shekel has stabilized recently and the central bank is pleased to see a cooling housing market. You sense the central bank is a bit more relaxed. But inflation is still well below the target.”

Economists and investors have pushed off their predictions for the next rate hike after a quarter marked by surprisingly slow growth, below-target inflation and a strong currency. Israel’s economy grew 1.4 percent in the first quarter after two straight quarters of above-average growth, mainly due to a sharp slowdown in car purchases. In its statement accompanying Monday’s decision, the bank said that other than cars, the economy continues to grow strongly following last year’s 4 percent expansion.

Forward Guidance

In April, the central bank’s research department pushed back its forecast for the next rate hike to the first half of 2018, and the median estimate in a Bloomberg survey this month showed economists now see rates holding steady through the end of 2017. They had previously expected one rate hike this year to 0.25 percent.

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Yields on 10-year Israeli government bonds, meanwhile, have dropped 10 basis points this month as investors accumulate longer-date securities, flattening the yield curve. In its last decision in April, the central bank changed its forward guidance, saying it will not begin to tighten policy until it sees that inflation is “entrenched” within the target range. Capital markets show inflation expectations are for a 0.7 percent increase in the second year from today.

Analysts are still optimistic about the economy’s trajectory, though, and exports, a key driver of Israeli output, rose 11 percent in the first quarter. That comes even though the shekel continues to trade near a record-high against a basket of currencies, although recent euro strength slightly weakened the effective shekel rate in late May.