Bank of Israel decided to keep base rate on hold

The Bank of Israel (BoI) decided to keep its base rate on hold at 0.10%, in line with expectations. The BoI staff has lowered both its inflation and growth forecasts substantially since its June forecasts. Notwithstanding, the BoI does not intend to loosen monetary policy at this time. In part this is because it views the setbacks as attributable to temporary factors that do not alter underlying trends. In normal times, this would probably not matter. The lower growth and inflation trend would be sufficient grounds to loosen monetary policy. But these are not normal times. Monetary conditions are extremely loose, with the rate near zero and money supply growth elevated. 

The BoI is not willing to undertake policies to loosen monetary conditions further. The available options - negative base rates, asset purchases other than FX, or accelerated FX purchases - are unattractive to them. Therefore, instead of explicit action, the BoI intends to delay rate hikes further. The BoI will not increase rates until H2 16, and at a relatively slow pace, to just 0.5% at end-2016, considerably lower than its June forecast of 1.25% at end-2016. Of course, part of the explanation for the BoI delay in rate hikes is the delay in Fed rate hikes.

The BoI has lowered its growth forecasts for both 2015 and 2016 by 0.4pp to 2.6% and 3.3%, respectively. The temporary factors for growth are the strike at export-intensive Israel Chemicals and temporary higher vehicle imports. In addition, downgrades of global growth and lower global trade volumes are exerting downward pressure on the economy. Still, the decline in exports and investment is very disconcerting to the BoI. It clearly is less confident about growth resiliency. The BoI somehow finds comfort in slightly higher exports in July and August, but notes that services exports "continues to lag behind the growth rate of world trade in services".

The BoI appears determined to remain on hold and wait until global economic conditions improve. Clearly, events have forced it into a more dovish posture, pushing rate hike farther away. However, events have not deteriorated enough to induce it to take explicitly loosen monetary conditions further.