Bank of Israel expected to hold rates Monday, with hikes not far off

JERUSALEM — The Bank of Israel is expected to keep short-term interest rates unchanged this week, its 14th such decision in a row, although analysts are expecting a hawkish tone that could lead to higher rates in the coming months as inflationary pressures mount.

All 12 economists polled by Reuters forecast that the central bank’s monetary policy committee (MPC) will keep the benchmark rate at an all-time low of 0.1% when the decision is announced on Monday at 4 p.m. (1400 GMT).

While other countries have faced an inflation surge, Israel has not, largely due to a very strong shekel that has moved to a 26-year high against the dollar and kept import prices down. The annual inflation rate stood at 2.4% in November, well within an official 1-3% target.

Last month, Bank of Israel Governor Amir Yaron told Reuters that the central bank was in no rush to raise interest rates since inflation was under control.

However, analysts see rising inflation as inevitable, especially with a tightening labor market in which the broadest measure of the jobless rate has fallen to 6.5%.

“Inflation pressure is likely to become persistent and require more hikes,” said BofA Securities economists in a report, predicting that rates will be hiked from the second quarter and end 2022 at 1%.

All six rate setters had voted to keep the benchmark interest rate at 0.1% at its prior meeting on Nov. 22 after one policymaker had voted for a rate increase to 0.25% on Oct. 7. They cited real interest rates in Israel as being negative and at a similar level to those in major economies.

The central bank has also largely let the shekel strengthen since the currency’s gains stem from a strong economic rebound from the COVID-19 pandemic, a current account surplus and large foreign inflows into the high-tech sector.

The shekel appreciated for most of 2021 despite the bank buying a planned $30 billion of foreign currency. Yaron has said the bank will still intervene when needed but without a pre-announced, set amount as was the case last year.

Israel’s economy, according to the bank’s last estimate in October, was expected to have expanded 7% in 2021 and is projected to grow 5.5% this year.

At Monday’s decision, the bank will issue updated macro forecasts and Yaron will hold his quarterly news conference at 4.15 pm. (Reporting by Steven Scheer, Editing by Louise Heavens)