The Bank of Israel, in a surprise move, raised short-term interest rates for the first time in more than seven years on Monday, and indicated that its monetary tightening path will be slow and steady. Led by acting governor Nadine Baudot-Trajtenberg, the monetary policy committee (MPC) decided to raise the benchmark interest rate ILINR=ECI to 0.25 percent from 0.1 percent — where it had stood since early 2015 — citing stable inflation and solid economic growth. "When we look to the future, we see the process of normalization of raising the interest rate is a gradual, cautious process. That's what we see for now," Baudot-Trajtenberg told reporters on a conference call. Just two of the 12 economists polled by Reuters had forecast a rate rise, while 10 others had expected no change. The decision pushed up the shekel, while bond prices fell. What made the decision particularly surprising was that at the last decision on Oct. 8, the central bank's economists had pushed back expectations for a rate increase to the first quarter of 2019 from the fourth quarter of 2018 due to lower than expected inflation. In all, the bank's staff expects the key rate to end 2019 at 0.5 percent. Annual inflation held steady at 1.2 percent in October, while an initial estimate of economic growth in the third quarter showed a weaker than forecast annualized 2.3 percent pace — leading economists to revise down their 2018 estimates slightly from 3.7 percent. "The timing of the interest rate hike seemed somewhat puzzling," said Gil Bufman, chief economist at Bank Leumi, noting that oil prices have slid 30 percent in recent weeks. At the Oct. 8 meeting, two of the six MPC members voted for a rate rise and the committee stressed an increase could come at any time. "We were relatively close to making this decision the last time," said Baudot-Trajtenberg, the bank's deputy head who has been acting chief since Karnit Flug's five-year term as governor ended in mid-November. Earlier this month the Israeli cabinet approved Amir Yaron, a professor at the University of Pennsylvania, as the new governor. He is expected to be sworn in next month, prior to the next policy meeting on Jan. 7. "The committee was very aware that we are in a transition period, a period of changing governors … but like in all previous decisions, the committee members believed decisions must be made based solely on data and economic analyses," Baudot-Trajtenberg said. She noted that Yaron was not told about the rate increase before the decision was made. SHEKEL GAINS, BONDS DIP The first increase since mid-2011 comes after the U.S. Federal Reserve has raised rates three times this year with more hikes expected in 2019, boosting the dollar. The shekel, which had weakened 3.2 percent against the dollar since the last rates decision, was up 0.5 percent to 3.7120 per dollar from its fixing of 3.7290, while bond prices fell as much as 0.8 percent and key Tel Aviv share indexes gained 1.3 percent. The Bank of Israel cited inflation that is stabilizing at the lower end of its 1 to 3 percent target range, with a rise in wages and the expansionary fiscal policy expected to "support the continued entrenchment of inflation within the target". "The main risk to this is the possibility of a sharp appreciation of the shekel," the central bank said. It also noted that the economy is growing at a solid pace and that the tight labor market indicates a high level of demand. "Even after an increase of the interest rate by 0.15 percentage points, monetary policy remains accommodative and will continue to support the attainment of policy targets," the central bank said.
