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Israel’s central bank signaled interest rates could fall below zero to help steer the economy through a global trade war and boost sluggish inflation. The shekel extended losses.
The monetary committee said Monday it could be necessary to leave rates at their current level for a “prolonged period” or even to cut them to get inflation around the midpoint of its 1%-3% range. Speaking after the decision, Governor Amir Yaron said negative rates are “one of the tools” the central bank is considering.
“If necessary, the Committee will take additional steps to make monetary policy even more accommodative,” it said in a statement.
The Bank of Israel held its key interest rate at 0.25% on Monday, in line with most forecasts. Alongside the statement from policy makers, the bank’s research staff in its quarterly forecast lowered next year’s outlook for economic growth and rates.
While rates have become entrenched below zero from Europe to Japan, Israel has never before made the leap into negative territory. Back in 2011, the Bank of Israel responded to a global downturn under Stanley Fischer’s leadership by starting a series of cuts that pushed the benchmark from 3.25% to a record low 0.1% in 2015. The key rate then stayed on hold until a surprise hike last November under an interim governor.
The central bank’s predicament now is that its tools are limited as it pivots toward a looser stance with rates stuck near an all-time low. Policy makers are already discussing why it may be time to reduce rates, Yaron said in prepared remarks, noting the decision on Monday wasn’t unanimous.
After starting his tenure last December with the goal of unwinding stimulus, Yaron instead oversaw a reversal toward an easing bias at the monetary committee’s last meeting in August. As a small open economy, Israel was in part swayed by a global dovish wave led by major central banks including the U.S. Federal Reserve.
Meanwhile, Israel’s currency has staged one of the world’s biggest rallies this year, a worry for policy makers because it risked further choking inflation, which was at an annual 0.6% in August.
The central bank may still take its time before making a move, with rates more likely stay unchanged in “the coming months,” according to Ofer Klein, head of economics and research at Harel Insurance & Financial Services Ltd.
“What will have the biggest impact is the global trade war and the way Britain leaves the European Union,” Klein said. “In addition, although the Bank of Israel has not intervened in the foreign-exchange market in recent months, we still believe that in the event of a rapid appreciation, the bank will act.”
The shekel is near the strongest ever when measured by one gauge tracked by the central bank that compares it against a basket of other currencies. But it was the third-worst performer globally on Monday, trading 0.7% weaker against the dollar after Yaron’s remarks.
Factors boosting the shekel include Israel’s current-account surplus, foreign investment, and its recent inclusion in a major government bond index that could lead to billions of inflows.
Short of experimenting with negative interest rates, the central bank has few options to boost inflation back into its target range. Yaron has said that it could intervene to buy foreign currency, weakening the shekel, but so far this year he’s declined to do so.
Economists from Goldman Sachs Group Inc. said in a recent note that the 3.40 dollar-shekel mark “remains a psychological limit which will trigger action.”
Not even political dysfunction has hampered the shekel’s appreciation. Israel remains in the midst of a leadership deadlock after a second round of national elections this year on Sept. 17 ended with inconclusive results, delaying the country’s ability to close its budget gap.
The central bank’s research department sees the key rate unchanged this year; between 0.1% and 0.25% at end-2020It cuts forecasts for economic growth in 2020 to 3%, reiterates this year’s outlookThe bank’s researchers also cut their inflation outlook for this year and next, lowering their forecast for the next four quarters to 1.2%
“The interest rate path was revised downward due to the decline in the inflation forecast and the increasing expectation of accommodative monetary policy worldwide,” the department said.
(Updates with Yarons’ comment in sixth paragraph.)
--With assistance from Harumi Ichikura and Alisa Odenheimer.
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