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Rate Hikes Derailed by Shekel Could Mean Much Longer Pause Ahead

Ivan Levingston
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Rate Hikes Derailed by Shekel Could Mean Much Longer Pause Ahead

(Bloomberg) -- The window of opportunity for the Bank of Israel to raise interest rates for the second time since 2011 is fast slipping away.

By leaving the key rate at 0.25% on Monday, the monetary committee extended its pause to almost six months as a rallying shekel keeps inflation too weak to increase borrowing costs. A deteriorating global outlook is creating yet another roadblock.

“The window for raising rates is closing rapidly,” Guy Beit-Or, head of macro research at Psagot Investment House Ltd., said in a note.

The shekel’s performance as one of this year’s standout currencies is complicating the central bank’s progress toward exiting years of ultra-low rates, following a surprise decision in November to raise rates. In a statement accompanying the decision on Monday, policy makers stepped up their language on the shekel, calling its appreciation “the main factor” delaying inflation’s pickup.

“They’re really signaling to the market that they’re still far from raising rates,” said Rafi Gozlan, chief economist for Israel Brokerage and Investments in Tel Aviv. “The influence of the currency rose in the past few decisions.”

The shekel retreated after the rate announcement and traded 0.3% weaker against the dollar as of 9:14 p.m. in Tel Aviv.

Lifted by Israel’s export-driven economy and foreign direct investment, the shekel has held up well even after policy makers said in the minutes of their last meeting that they’ll consider buying foreign currency for the first time since January if the appreciation trend continues.

In April, the central bank’s research department forecast that the benchmark rate will rise to 0.5% toward the end of the third quarter.

“They have not been able to substantially start the normalization,” said Gil Bufman, chief economist at Bank Leumi Le-Israel, who added that if rates don’t rise at the next decision July 8, it could be a while before another chance arises.

Despite the economy growing at the quickest pace since 2016, consumer inflation has remained muted.

The latest data showed inflation unexpectedly decelerated to an annual 1.3% in April, near the lower end of the central bank’s 1%-3% target range. Governor Amir Yaron wants to stabilize inflation around the 2% midpoint.

“I do see inflation continuing to drop down, provided that nothing dramatic happens,” Bufman said.

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky

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