September 4, 2017 / 7:52 AM / 10 months ago

No rate hike in Israel until inflation reaches target: central bank chief

JERUSALEM (Reuters) - Bank of Israel Governor Karnit Flug said on Monday there would be no reason to raise short-term interest rates until annual inflation moved back into the government’s 1-3 percent target range.

Bank of Israel Governor Karnit Flug speaks during an interview with Reuters at her office in Jerusalem October 28, 2015. REUTERS/Ronen Zvulun

The bank’s benchmark rate ILINR=ECI has stood at 0.1 percent since early 2015 and many economists do not expect a hike until late 2018 or early 2019.

That timeframe tallies roughly with the central bank’s view that inflation will re-enter its target range sometime in 2018.

Israel experienced 28 straight months of year-on-year deflation through to last December, followed by five months of inflation. Prices then began falling again, and the inflation rate dropped to -0.7 percent in July from -0.2 percent in June.

The central bank cited mainly temporary factors for that drop such as technical changes in the inflation index's clothing and footwear component - as well as gains in the shekel currency ILS=.

“Once we see that the inflation (rate) settles back within the target range, that will be the time to change the interest rate,” Flug told a business conference hosted by financial newspaper Calcalist.

Flug noted that a benefit of low interest rates had been cheap credit and hence strong consumer spending and, while consumer borrowing has jumped in recent years, that did not pose an immediate economic risk.

Flug also said she watched the foreign exchange market, particularly on “stormy days”.

The central bank intervenes periodically in the market to stem gains in the shekel, which has risen more than 7 percent against the dollar so far in 2017 and is near a three-year high.

It is also close to an all-time peak against a currency basket comprising Israel’s largest trading partners.

Flug rejected the contention that the central bank’s interventions were helping speculators. “We have not found evidence of speculative activity in the foreign exchange market,” she said.

Reporting by Steven Scheer; editing by John Stonestreet

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