Rates remain on hold and the bias remains dovish

ISRAEL - In Brief 10 Jan 2020 by Jonathan Katz

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As expected, the BoI left the rate unchanged, but the interest-rate announcement came in a little bit more dovish than expected. The announcement stressed the low-inflation environment and the difficulties to return inflation back to the target range amid the strengthening of the shekel. The use of forward guidance was exactly the same as in the previous announcement, leaving room for another rate cut later this year. In its announcement, the bank referred to the low headline and core inflation rates (0.3% and 0.5% respectively) and to inflation expectations that remained around the lower bound of the target range. On the other hand, the economy continued to grow steadily in the fourth quarter and, although the global economy continues to slow, the risk of a significant worsening has declined. In addition, it appears that the process of monetary accommodation (interest-rate cuts and quantitative-easing programs) has reached its limit so far. The Bank of Israel Research Department slightly lowered its growth forecast, from 3.0% to 2.9%, on a downward revision of export growth. However, the growth rates for government consumption and private consumption were revised slightly higher. The forecast for 2020 factors in the effect of the beginning of natural-gas production, which the BoI has assessed to be worth 0.3 percentage points in terms of GDP growth. Growth in 2021 is expected to reach 3.2%. The Research Department’s forecast puts inflation in 2020 at an expected 1 percent, 0.2 percent lower than in its previous forecast At the press briefing on the monetary policy, the Governor remarked on the Bank of Israel's significant intervention in the foreign-exchange market. A...