Israel Monetary Policy February 2018

Israel: Bank of Israel holds rates for 32nd time in February; inflation expectations tick up

On 26 February, 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. February’s decision was unanimously expected by market analysts, and the rate has now gone unchanged for 32 consecutive monetary policy meetings. It was last cut three years ago, in February 2015.

For another month, the low inflation environment left the Bank with little room to maneuver. In fact, inflation fell in January, although a short-term decline in the inflation rate was expected by the Bank. Upbeat economic activity and the tight labor market have persistently failed to translate into higher prices. Cautious optimism did spring, however, from a recent uptick in short-term inflation expectations, with wage increases likely to support the return of inflation towards the Bank’s 1.0%–3.0% target range late this year. Other data tracked by the Bank was mixed in February; the shekel weakened, and the property market continued to slow.

In its second meeting of the year, the Bank once again affirmed its commitment to maintaining loose monetary policy as it grapples with stubbornly low inflation. Furthermore, it signaled that its accommodative stance would persist until inflation returns to within the target range. Expecting inflation to remain low this year, FocusEconomics Consensus Forecast panelists forecast the long-awaited tightening cycle to begin no earlier than the third quarter, when inflation could first return to within the Bank’s target range. That said, most of our panelists expect at least one rate hike by the end of 2018.

The Bank’s third monetary policy meeting of the year is scheduled for 6 April.

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