Israel Monetary Policy January 2018

Israel: Bank of Israel holds rates for 31st time in January on low inflation

On 10 January, the Bank of Israel decided to leave the interest rate unchanged at 0.10%, citing persistently low inflationary pressures and economic growth in line with potential. January’s decision was unanimously expected by market analysts, and the rate has now gone unchanged for 31 consecutive monetary policy meetings. It was last cut in February 2015.

Once again, near-zero inflation left the Bank little room to maneuver. Inflation has not notably increased since the Bank’s previous interest rate decision in November, suggesting that labor market tightness and related wage increases have not yet translated into higher prices. Unsurprisingly, the Bank’s 1.0%–3.0% target remains well out of reach. Moreover, the Bank stressed ongoing price reductions by the government, increased competition in the economy and the further appreciation of the shekel as limiting factors to the positive evolution of inflation over the short term. Furthermore, data from the real sector has been underwhelming in recent months; economic activity appeared to grow near potential in the fourth quarter, while the housing market continued slowing in the final stretch of the year.

In its first meeting of the year, the Bank once again affirmed its commitment to maintaining loose monetary policy as it grapples with the low inflation environment. Furthermore, it signaled that its accommodative stance would persist until inflation returns to within the target range. Expecting inflation to remain low this year, neither the Bank nor FocusEconomics Consensus Forecast panelists forecast the long-awaited tightening cycle to begin before Q3 2018. That said, most of our panelists expect at least one rate hike by the end of 2018.

The Bank’s second monetary policy meeting of the year is scheduled for 26 February.

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