Bank of Israel Surprises With Rate Rise Before Transition

(Bloomberg) — The Bank of Israel raised its benchmark interest rate to 0.25 percent on Monday, an unexpected move that brought nearly four years of record-low borrowing costs to a close.

The bank, in a statement accompanying the rate decision, assessed that borrowing costs would rise in a “gradual and cautious” manner. The shekel gained as much as 0.8 percent against the dollar, extending its daily advance and recouping some of its loss since the last rate decision on Oct. 8.

Monday’s decision, presided over by acting Governor Nadine Baudot-Trajtenberg, came amid quickening inflation and slowing economic growth. It shifted the landscape for incoming Governor Amir Yaron, a finance professor at the Wharton School of the University of Pennsylvania who is due to take over on Dec. 24.

“We were close to taking this decision last time, but only now did we think we were ready and the economy was ripe for this change,” Baudot-Trajtenberg said in a call with reporters. She noted that economic growth is continuing at a “handsome pace” and that inflation had stabilized at the low end of the 1 to 3 percent target band.

Ahead of Expectation

The Bank of Israel held its interest rate steady for years of little or no inflation, in the process moderating the strong shekel’s gains to the benefit of the country’s exporters. The low borrowing costs sent housing prices soaring by bumping up demand, but Baudot-Trajtenberg said the rate rise won’t impact real estate in the short term.

The decision was expected by 3 of 18 economists surveyed by Bloomberg. The Bank of Israel’s research department had expected the rate, which had held at 0.1 percent since March 2015, to rise early next year.

Yaron’s predecessor, Karnit Flug, had wanted inflation to become entrenched within its target range before raising rates, and it entered the band in June.

Israel’s consumer price index rose 1.2 percent on-year in October. Forecasters surveyed by the bank expected consumer prices to rise 1.1 percent in the next 12 months.

Growing Appetite

Appetite for higher borrowing costs has been growing at the bank, with two out of six monetary committee members voting to raise them at their last meeting in October.

Yaron, who will preside over his first rate decision on Jan. 7, will have to guide this tighter monetary policy at a time when robust economic growth appears to be falling off. Israeli output grew a disappointing 2.3 percent in the third quarter, but the Bank of Israel said the economy is “converging to its potential growth rate,” despite some slowdown from April through September. Current indicators support the assessment that the economy is at full employment, it said.

(Updates with comments by acting governor from fourth paragraph.)

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