Bank of Israel Governor Amir Yaron ruled out a near-term interest rate increase in the wake of a strengthening shekel on Wednesday, citing a surprising easing of inflation pressures and looser policies of major global central banks.
Since the last rate decision on July 8, data showed annual inflation dropping to 0.8% in June from 1.5% in May. That is below the government's 1%-3% annual inflation target and a rate of 2% the central bank is seeking to reach.
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Yaron noted that major central banks look to return to expansionary measures, particularly the US Federal Reserve which has had "a significant impact" on the shekel's exchange rate and which is also expected to influence inflation.
"In light of these developments, I estimate that for an extended period of time there will be no decision to raise interest rates," Yaron said in a statement on Wednesday.
"Moreover, if necessary, we have more tools available," he said in a likely reference to intervention in the foreign exchange market.
The Fed was expected to cut interest rates on Wednesday for the first time in a decade.
Four out of five Bank of Israel monetary policy members voted for no rate change this month on a view that the inflation environment had been stable for several months within the target range while there was high uncertainty regarding economic developments in Israel and abroad.
But according to the meeting, MPC members agreed that in the coming months "conditions could ripen for increasing the interest rate by 0.25 percentage points" contingent on the inflation environment and domestic and foreign economic developments.
One member voted for a quarter-point hike.
Following the rate decision, Yaron said it might be necessary to raise rates in one of the upcoming meetings, stressing that while developments abroad influenced Israel, "we do not need to be one-on-one to what is happening in the big blocs."
His comments helped to strengthen the shekel, which has gained 2% versus the dollar this month and nearly 7% in 2019.
After Yaron's latest comments, the shekel weakened 0.2% to 3.5 per dollar, a 16-month peak, from a session high of 3.47 earlier in the day.
