JERUSALEM (Reuters) - Economic conditions do not yet warrant a rise in interest rates, Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg said on Sunday, rejecting a growing belief that higher rates are needed to build “ammunition” in case of an economic downturn.
Last month, the central bank held its benchmark rate ILINR=ECI at 0.1 percent — a level it has stayed at since early 2015.
“It takes as much work, integrity, and at times courage to hold rates as to change interest rates just to get a headline,” Baudot-Trajtenberg said at a farewell conference for Bank of Israel Governor Karnit Flug.
Flug’s term ends on Nov. 12 and she has opted not to stand for a second five-year tenure.
U.S. finance professor Amir Yaron has been nominated to replace Flug but has yet to be approved by a special vetting committee. Yaron’s appointment also needs government approval.
In the meantime, Baudot-Trajtenberg will be acting governor and likely head the upcoming policy decision on Nov. 26.
She noted that a number of analysts fear the Bank of Israel may not have the necessary tools to mitigate a down cycle when it comes around and would like to see a more rapid rise in rates to build “ammunition”.
But, “the level of the nominal interest rate does not constitute ammunition. It is the real level of interest (rates) that counts, in which case a higher inflation level is what would provide ammunition, not a higher nominal rate,” Baudot-Trajtenberg said.
After a long period of disinflation and inflation below the government’s annual target range of 1 to 3 percent, Israel’s inflation rate now stands at 1.2 percent, although economists expect the rate to temporarily dip back below 1 percent in the coming months.
At the same time, the economy is set to grow around 3.7 percent in 2018.
“We are now on the road to higher inflation. It has been a long and bumpy one, and may not be smooth ahead either,” Baudot-Trajtenberg said. “We will respond in a way that does not jeopardize the continued path to the target range. (Also) the interest rate is not the only tool in the Bank of Israel toolkit, and there is no reason to narrow it only to that.”
The central bank’s own economists expect the key rate to begin rising in the first quarter, with a total of 40 basis points of tightening in 2019.
Reporting by Steven Scheer; Editing by Emelia Sithole-Matarise