Bank of Israel seen holding rates for fourth straight month

Reuters

By Steven Scheer

JERUSALEM (Reuters) - Israel's central bank is expected to leave short-term interest rates unchanged for a fourth straight month due to moderate economic growth and continued gains in home prices.

Along with a tame annual inflation rate of 1.3 percent, the most compelling reason to ease policy again would be a more than two-year peak of the shekel against the dollar at a level of 3.50. But analysts believe the Bank of Israel has other tools - such as market intervention - it is more likely to use to try to prevent a further appreciation of the currency.

That is because the benchmark interest rate is already at 1.25 percent and a quarter-point reduction would likely have minimal impact on the shekel or the economy, they say.

The Bank of Israel's monetary policy committee has been led by deputy governor Karnit Flug since July, after Stanley Fischer stepped down at the end of June. Naming a replacement has hit a number of snags but the government is expected to announce a new governor in the coming weeks.

The Bank of Israel is slated to announce its rates decision for October on Monday at 3 pm (1200 GMT). It last lowered rates in May, by a total of 50 basis points in two reductions.

"The loose monetary stance that has been in place since the third quarter of 2012 remains intact but further easing is becoming unlikely," said Tevfik Aksoy, an emerging markets economist at Morgan Stanley.

"The main issue (for the Bank of Israel) is the appreciation pressure on the currency," he said, adding the shekel should stay strong due to a sound economy and natural gas output boosting Israel's current account surplus.

Much of the shekel's recent gains have also come as U.S. military action in Syria has become unlikely, while the Federal Reserve has delayed tapering off its U.S. bond buying programme - a combination that lifted most global currencies.

Helped by the start of natural gas production at the end of March and robust consumer and state spending, the economy is likely headed for growth of at least 3.4 percent in 2013, according to estimates from the government and analysts. The economy grew an annualised 4.9 percent in the second quarter.

Along with the rates decision, the central bank's research staff on Monday are also expected to publish revisions to their economic growth estimates. The Bank of Israel's economists currently project a 2013 growth rate of 3.8 percent, including a 1 percentage point contribution from natural gas, and a 3.3 percent pace in 2014.

"With growth remaining reasonably resilient and home prices rising, we think the Bank of Israel is reluctant to cut further," said Daniel Hewitt, an emerging markets economist at Barclays Capital. "With the housing market heating up, the Bank of Israel wants to avoid sparking a bubble."

Partly due to low interest rates, home prices have jumped more than 50 percent in recent years, leading the central bank to place restrictions on mortgages. But those steps have not worked since demand has outstripped supply, while real estate has proven to be among the best investments of late.

(Editing by Pravin Char)

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