By Steven Scheer
JERUSALEM (Reuters) – Israeli short-term interest rates may continue to rise even before inflation reaches the 2 percent rate the central bank desires, the Bank of Israel’s outgoing deputy governor said.
The central bank kept rates steady this week for the second monthly meeting in a row, after a surprise rate increase in November. It said the path of rate hikes would be “gradual and cautious”, to help inflation stabilize “around the midpoint of the target range” and support economic activity.
But Nadine Baudot-Trajtenberg, whose five-year term ended on Thursday, said the bank would not necessarily have to wait until the inflation rate hit 2 percent — the middle of the government’s 1-3 percent annual inflation target.
“Our aim is indeed to return inflation to the midpoint in the range so we have to have an interest rate path that is compatible for that,” she told Reuters.
“That of course doesn’t mean we’re going to wait until inflation is in the mid-range for the next move,” the Canadian-born economist said.
She said the path nevertheless needs to be cautious since there are conflicting factors at work — rising wages and a tight labor market in a moderately growing domestic economy, while the global economy is slowing.
“The wind coming from outside is now less encouraging,” she added, citing a question mark for Europe’s economy and its near-term monetary policy.
Israel’s inflation rate was 1.2 percent in January and is expected to be 1 percent in a year’s time, based on bond yields.
The central bank’s economists project steady rates over the first half of 2019 and a quarter-point rise in the third quarter, to bring the key rate to 0.5 percent at year’s end. They foresee another hike in the first quarter of 2020 and a rate of 1.25 percent by the end of next year, with inflation at 1.3 percent this year and 1.8 percent in 2020.
Baudot-Trajtenberg was acting governor when the bank raised rates by 15 basis points in late November, having taken the reins after central bank chief Karnit Flug opted not to continue when her five-year term ended in mid-November. U.S. finance professor Amir Yaron succeeded Flug a month later.
Some economists criticized the November move on grounds that inflation of 1.2 percent was hardly “entrenched” within the target, as the central bank had sought.
“I don’t think you can tell now if it was the right or wrong decision,” Baudot-Trajtenberg said, noting that the hike came only one meeting sooner than analysts had expected.
“If you look at all the data we look at, we are in line with what we were seeing in November. We still expect relatively strong growth, wage increases have accelerated and fourth-quarter data came out stronger.”
At the same time, forces that kept inflation down have abated, with electricity and other administrative costs rising.
Baudot-Trajtenberg also said she was worried about a likely rise in Israel’s debt burden amid some loosening of fiscal policy.
Israelis will vote on April 9 in a national election pitting Prime Minister Benjamin Netanyahu — whom Israel’s attorney-general said on Thursday he intends to indict on corruption charges — against a coalition of upstart centrist rivals.
Baudot-Trajtenberg, who analysts believed should have been considered to be governor, said she would have stayed at the bank longer but she could not commit for another five years.
“We have been on the same wavelength from the start,” she said of Yaron. “I think he will be a very good governor.”