Israel Has ‘Luxury’ of Waiting Before Hiking Rates: Decision Day

(Bloomberg) -- Robust economic growth and relatively low inflation will likely lead the Bank of Israel to hold borrowing costs on Monday and for months to come, opening up the prospect of a rates spread with the U.S. that could weaken the roaring shekel.

Analysts see Israel's benchmark rate staying steady at 0.1% until late 2022 or early 2023, though inflation is heating up and the economy remains potentially threatened by the highly contagious omicron variant. All 11 economists surveyed by Bloomberg expect borrowing costs to hold on Monday.

The U.S. Federal Reserve, by contrast, recently signaled it expects to raise rates three times next year as it battles the hottest inflation in a generation. A rates differential could tamp down the shekel -- the world's strongest currency in 2021 -- by making it slightly less appealing, said Modi Shafrir, chief strategist at Mizrahi-Tefahot Bank Ltd.

“The Bank of Israel would like to see the interest rate differential between the U.S. and Israel because this is something that could mitigate the appreciation pressures,” Shafrir said. The Bank of Israel declined to comment.

The central bank bought more than $30 billion in foreign currency last year to try to weaken the currency, which is now trading near a level that broke a quarter-century high against the dollar.

At 2.4% in November, Israel's annual inflation remains within the government's 1% to 3% target band -- contained in part by the strong shekel, which has brought down the cost of imported goods. Bank of Israel Governor Amir Yaron recently said the inflationary picture gives policy makers the “luxury” of waiting to see how other countries respond to price gains.

The central bank “doesn't have the need, or the compulsion, to immediately tackle and to operate the interest rate tool like in other countries where inflation is already very high,” he said in a Dec. 21 interview.

Still, Israel's inflation is accelerating as the prices of food, real estate and durables rise. That has some analysts predicting more hawkish talk from the bank.

“My current forecast is not that we'll get to that 3%, but I believe that the risks are definitely tilted towards that,” said Guy Beit-Or, chief economist at Psagot Investment House Ltd. “What is very important for me to see is how they change their language regarding the inflationary risks in Israel.”

Israel Consumer Prices to Rise 1.8% Next 12 Months: BOI Survey

The rapidly spreading omicron variant is also casting a long shadow over the economy.

The Bank of Israel's research department has forecast the economy grew 7% last year as it rallied from the ravages of multiple virus-related lockdowns, significantly stronger than projections for the European Union and U.S. A soaring virus caseload threatens to erode that gain, with Bank Leumi analysts writing in a recent investor note that the virus continues to pose a threat to the labor market.

Prime Minister Naftali Bennett said Sunday that he expects Israel will soon register tens of thousands of new cases daily, an exponential explosion in the country of 9.5 million people.

Goldman Sachs predicted recently that Israel's inflation figures and the enduring strength of the shekel mean the Bank of Israel is unlikely to raise rates before 2023. Mizrahi-Tefahot forecast policy makers would move slightly sooner, raising borrowing costs to about 0.25% “very late” this year.

But even if the Bank of Israel does end up hiking rates later this year, borrowing costs “will still remain way below the level of inflation, which is a situation that encourages investments and consumption,” Bank Hapoalim said in a recent investor note.