Conditions still not ripe for rising rates in Israel

By Steven Scheer

JERUSALEM (Reuters) – Economic conditions do not warrant a rise in interest rates yet, Nadine Baudot-Trajtenberg, deputy governor of the Bank of Israel, said on Sunday rejecting the idea that higher rates were needed to build "ammunition" in the event of an economic downturn.

Last month, the central bank maintained its benchmark at 0.1% – a level at which it has remained since early 2015.

"It takes as much work, integrity and sometimes courage to maintain rates as to change interest rates simply to make headlines," said Baudot-Trajtenberg at a conference conference. Farewell Governor of the Bank of Israel, Karnit Flug.

Flug's term ends on November 12 and she chose not to run for a second five-year term.

American finance professor Amir Yaron has been appointed to replace Flug but has not yet been approved by a special validation committee. The appointment of Yaron also needs government approval.

Meanwhile, Baudot-Trajtenberg will be acting governor and will probably lead the political decision to come on November 26th.

She noted that a number of badysts were concerned that the Bank of Israel may not have the necessary tools to mitigate the economic slowdown cycle and would like to see a faster rise in the rates of production of "ammunition".

But, "the level of the nominal interest rate does not constitute ammunition.It is the actual level of interest rates), in which case a higher level of inflation is what would provide ammunition, not a higher nominal rate, "said Baudot. Trajtenberg said.

After a long period of disinflation and inflation below the target range of 1 to 3% set by the government, the Israeli inflation rate now stands at 1.2%, although expect it to return temporarily below the 1% mark in the coming months.

At the same time, the economy is expected to grow by about 3.7% in 2018.

"We are now on the way to a rise in inflation, it has been long and bumpy, and may not be smooth," said Baudot-Trajtenberg. "We will respond in a way that does not compromise the continued shift to the target range. (In addition), the interest rate is not the only tool in the Bank's toolbox." Israel, and there is no reason to reduce it to that alone. "

Central bank economists predict that the key rate will begin to rise in the first quarter, with a total tightening of 40 basis points in 2019.