Israel's central bank left its key interest rate at 0.1 percent, as widely expected, and reiterated that it still expects to keep its monetary policy stance accommodative "for a considerable time" in light of the inflation environment, the global economy, the exchange rate of the shekel and the monetary policy of major central banks.
The Bank of Israel (BOI), which has maintained its rate since cutting it to the current level in March 2015, also confirmed its recent view that the risks of reaching its inflation target "remain high" but higher wages and global inflation are expected to help inflation return to the target of 1-3 percent.
Last week the BOI said in its monetary policy report for the second half of 2016 that its monetary policy committee (MPC) had stopped considering the use of unconventional monetary policy tools, such as negative interest rates or bond purchases, in light of unexpectedly strong economic growth, a strong labour market and rising inflation expectations.
BOI staff are forecasting an unchanged policy rate until the fourth quarter of this year when the rate would be increased by 15 basis points following another 25 point hike to 0.5 percent in 2018.
Israel's inflation rate turned positive in January for the first time since July 2014 as inflation rose to 0.1 percent from minus 0.2 percent due to higher food and housing prices.
Economic activity in Israel is also continuing to improve with Gross Domestic Product up by an annual 3.8 percent in the fourth quarter of 2016, up from 3.6 percent in the third quarter, though the BOI said growth was boosted by "an atypical" increase in vehicle imports.
Net of this increase, it assessed growth slightly above 3 percent, with exports growing strongly while private consumption had moderated "markedly."
Economists are forecasting growth of 3.2 to 3.5 percent this year from 4 percent last year.
The exchange rate of Israel's shekel has risen by 3 percent against the U.S. dollar since the previous MPC meeting on Jan. 22 through Feb. 24, the BOI said, adding that the "level of the effective exchange rate continues to weigh on the developments of goods exports."
The Bank of Israel issued the following statement with the main considerations underlying its decision: