January 7, 2019 / 4:28 PM / in 3 months

UPDATE 2-Bank of Israel holds key rate at 0.25 pct, sees gradual tightening

(Repeats to add byline without change to text; recasts, adds governor’s comments)

By Steven Scheer and Ari Rabinovitch

JERUSALEM, Jan 7 (Reuters) - Bank of Israel Governor Amir Yaron said monetary tightening will be slow after the central bank left short-term interest rates unchanged in Yaron’s first decision.

All 10 economists polled by Reuters had expected no move.

Yaron was sworn in on Dec. 24 and replaces Karnit Flug, whose term ended in mid-November. At the subsequent meeting on Nov. 26, under deputy governor Nadine Baudot-Trajtenberg, policymakers raised the benchmark interest rate to 0.25 percent from 0.1 percent in a surprise move.

Speaking to reporters after the decision to hold rates this time, Yaron said “the rising path of the interest rate in the future will be gradual and cautious”.

Modi Shafrir, chief strategist at Mizrahi-Tefahot Bank’s finance division, called both the statement and Yaron’s comments “dovish”.

In an updated forecast, the central bank’s own economists expect the key rate to remain on hold for the first half of 2019 and rise once in the third quarter to end the year at 0.50 percent. They foresee another hike in the first quarter of 2020 and a rate of 1.25 percent by the end of next year, with an inflation rate of 1.3 percent this year and 1.8 percent in 2020.

“If these forecasts are realised, they will be consistent with gradual contraction of the monetary policy accommodation,” Yaron said.

In keeping rates steady, the Bank of Israel said data showed the economy was performing well and the labour market was tight, with economic weakness in the second and third quarters due to one-time factors.

The bank believes continued wage increases will help push inflation higher.

Israel’s economy grew an estimated 3.2 percent in 2018 — below a 3.7 percent forecast — and the Bank of Israel expects a 3.4 percent rate this year, down from a previous estimate of 3.6 percent. It also set an economic growth forecast of 3.5 percent for 2020.

Yaron noted that along with a decline in Israel’s current account surplus and the widening interest rate gap with the United States, the shekel has depreciated gradually. If the trend changes, that could slow the increase in inflation towards 2 percent, he said.

Although the central bank has not intervened in the foreign exchange market for almost a year, Yaron said intervention was still one of the bank’s policy tools.

“To the extent that there will be anomalous fluctuations that are not in line with fundamental economic conditions, the foreign exchange market intervention tool is still available to the Bank of Israel,” he said.

The shekel has depreciated 2 percent versus the dollar the past six months. It weakened slightly to 3.70 to the dollar after the rates announcement.

Additional reporting by Tova Cohen; Editing by Toby Chopra and Alison Williams

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