Israel central bank holds rates as economy growing at ‘solid pace’

FILE PHOTO: An Israeli flag flutters outside the Bank of Israel building in Jerusalem

By Steven Scheer

JERUSALEM (Reuters) – The Bank of Israel on Monday left its benchmark interest rate <ILINR=ECI> at 0.1 percent, the same level it has been for more than two years, saying the economy continues to grow at a solid pace.

All 10 economists polled by Reuters had forecast no change by the central bank, which is widely expected to hold the line on rates until the second quarter of 2018, when a hike is forecast.

In a preliminary estimate, Israel’s economy grew a slower-than-expected annualised 1.4 percent in the first quarter in a period that was held back by a surge of car buying late in 2016 ahead of tax increases at the start of 2017. Economists on average had forecast a 3.7 percent increase.

The central bank acknowledged that volatility in vehicle purchases had an effect on data from the fourth quarter of 2016 — in which the economy grew an annualised 4.7 percent — and first quarter of 2017.

“Net of this effect, the economy has been growing strongly for approximately a year and a half, and the pace may even be higher than the long-term growth potential,” the Bank of Israel said, noting the labor market was near full employment. “In the first quarter, the improvement in growth of exports continued, against the background of the expansion of world trade.”

Annual inflation eased to a 0.7 percent rate in April from 0.9 percent in March, remaining below the government’s target range of 1-3 percent.

The central bank said that while wages were rising, inflation in tradable goods remained negative mainly due to the continued appreciation of the shekel, which stands at a 28-month high versus the dollar <ILS=> and all-time peak against a basket of currencies.

“The increasing competition in the economy, as well as additional policy measures announced by the government –reducing purchase tax and customs on various products and lowering the cost of afterschool care — may continue to slow the return of inflation to the target range,” it said.

In April, the central bank estimated an inflation rate of 0.8 percent in 2017, rising to 1.5 percent in 2018. It also projects economic growth of 2.8 percent this year, down from 4 percent in 2016.

The central bank, which said there was a cooling of the housing market, reiterated that the monetary policy committee “intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range.”

The bank stressed a divergence of monetary policy globally, saying the Federal Reserve is expected to rate U.S. rates in June while Europe and Japan continue accommodative policies.

(Reporting by Steven Scheer; Editing by Toby Chopra)