August 29, 2017 / 1:48 PM / a year ago

UPDATE 1-Bank of Israel holds benchmark interest rate at 0.1 pct

(Adds details from central bank statement, background)

TEL AVIV, Aug 29 (Reuters) - The Bank of Israel left its benchmark interest rate at 0.1 percent on Tuesday for the 28th time since early 2015 amid slower than expected economic growth and deflation.

The annual inflation rate fell to -0.7 percent in July from a year earlier, the deepest rate of deflation since last August, and down from -0.2 percent in June. Israel has an annual inflation target of 1 to 3 percent.

All 10 economists polled by Reuters had forecast no change in interest rates by the central bank, which is widely expected to hold the line on rates until at least the second quarter of 2018.

“The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range,” the central bank said in a statement.

The central bank noted that the decline in the inflation rate does not reflect a decrease in demand. Rather, the consumer price index was temporarily impacted by technical changes in the method of measuring the clothing and footwear component.

The appreciation in the exchange rate up to July also had a sharp downward impact on prices of tradable goods, while enhanced competition in the economy is “apparently preventing price increases in some industries”, it said.

More recently, the shekel’s rise has halted.

“The wage increases in the economy and the change in the trend of the exchange rate, to the extent that it persists, will support inflation,” the statement said.

Israel’s economy grew 4 percent in 2016 but started off this year slower, growing an annualised 0.6 percent in the first quarter and 2.7 percent in the second quarter, below economists’ 3.2 percent forecast in a Reuters poll.

The most recent data indicate continued economic growth at a similar rate in the beginning of the third quarter, the bank said.

“The moderation in growth reflects supply side constraints derived from the labour market being at full employment — the job vacancy rate continues to increase; participation and employment rates are stable at high levels, and unemployment is low,” it said. (Reporting by Tova Cohen and Ari Rabinovitch; Editing by Hugh Lawson)

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