Bank of Israel set for first rate decision in post-Flug era

Bank of Israel set for first rate decision in post-Flug era

The Bank of Israel Monetary Committee will publish the interest rate decision for December tomorrow. Deputy Governor of the Bank of Israel Nadine Baudot-Trajtenberg will chair the meeting as Karnit Flug has ended her term of office as Governor, while her successor Amir Yaron will not assume the job until next month. The interest rate has been rooted at its historic low of 0.1% since March 2015, but that may change tomorrow. However there is no consensus among the analysts, Globes reports.

Leader Capital Markets writes, "The interest rate is likely to rise tomorrow, given that inflation has stabilized within the target range, reasonable growth is continuing, the labor market is tight, fiscal policy is expansionary, and the shekel is depreciating." Leader Capital Markets says that considerations against raising the interest rate include a steep drop in oil prices and on global financial markets.

On the other hand, Leumi Capital Markets does not expect the Bank of Israel to change the interest rate tomorrow. Analyst David Reznik writes, "The set of data published since the last interest rate decision (in early October) supports keeping the interest rate at its low level. Among other things, the drop in the market's inflationary expectations, the third quarter growth figures, the steep fall in oil prices over the past month, and the increased uncertainty about global growth, reflected in lower global growth forecasts, can be cited. In addition, there is greater uncertainty about the ability of central banks to raise the interest rate in the coming year (mainly the euro bloc) and the ability to continue raising the interest rate at the current pace (in the US).

"In summary, we believe that actual inflation (in the past 12 months) is likely to remain in the vicinity of the target range's lower bound, i.e. 1%. Later, in 2019, inflation is likely to moderate, so the "inflationary environment" is likely to remain low for a long time. For this reason, combined with the third quarter growth figures (with an emphasis on the quarterly growth rate), plus the scheduled entry of the new governor of the Bank of Israel in December, the probability of an interest rate hike in the near future is low, especially in the upcoming decision next week."

Psagot writes that even though conditions for an interest rate hike have matured, the Bank of Israel will wait for the new governor. Psagot chief economist Ori Greenfeld writes, "Early last month, the Bank of Israel decided not to raise the interest rate, even though the markets were fully prepared for this historic moment. Since then, the reasons cited by the Bank of Israel as having delayed an interest rate increase now once again support an increase. The Consumer Price Index in September and October show that the slowing of inflation was merely temporary, the shekel went on weakening, and even the weak growth figures do not really indicate a slowdown if the effect of vehicles is excluded. The fall in the price of oil should also not cause members of the Monetary Committee to lose sleep, because in contrast to the US, in Israel, two thirds of the price of a liter of gasoline consists of taxes, and the effect of changes in the price of oil is weak. Furthermore, the price of gasoline is set in shekels (meaning that the effect of the shekel's depreciation against the dollar offsets some of the drop in the price of oil). For this reason, the Bank of Israel's inflation expectations should ostensibly not change much. In the bottom line, assuming that the Bank of Israel does want to raise the interest rate, the conditions for doing this have matured.

"At the same time, since the new Governor has not yet entered his post, it is unclear whether the Monetary Committee and the temporary Governor who heads it will decide to establish facts, or whether they will wait for such an important measure until Amir Yaron begins his term. In any case, the precise timing of the first interest rate hike is not really important. What is really important is the plan for raising the interest rate over the next year or two. In this aspect, we still believe that the likelihood of higher-than-expected inflation and a quicker increase in the interest rate is greater than the opposite scenario. We therefore continue to prefer short-term loans and surplus exposure to the index-linked component," Greenfeld writes.

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