Worries about Israel's deflation and tepid growth likely put BoI on hold

The Bank of Israel (BoI) kept its 0.10% base rate on hold, as expected. The BoI has no appetite to loosen monetary policy under the current circumstance even though it remains concerned about the very low inflation level, weakening growth, and ILS appreciation. 

Instead, the BoI appears to be prepared to keep its historically low base rate at 0.10% for an extended period, until inflation rises into the 1-3% target.

BoI noted that inflation at -0.5% y/y in September is extremely low, and the prospects are that in the next few months it will push even lower given government policies. One-off factors in September that were responsible for the further descent into deflation include cancellation of the television fee and the cut in electricity prices, along with accelerated decline in fuel prices in the background. 

"In the next two months, the 1% cut in the VAT rate and continuing effects of the electricity price cut are expected to reduce CPI further. With medium-term inflation expectations in the target range, the BoI is not overly concerned about inflation. However, it notes in the important last paragraph of the statement that "risks to achieving the inflation target remain high"", says Barclays.

As to growth, the BoI reserves a special kind of ambiguous language to describe trends. It notes that the increased violence in Israel and the occupied territories has had a negative effect on consumption and tourism, maintaining that this effect will likely be temporary. It notes with concern that exports and imports of goods declined in September. 

As an offset, the Companies Survey has held steady, employment indicators continue to improve, and tax collection has increased substantially in 2015. Nevertheless, the BoI concludes that "risks to growth have increased".