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US DOLLAR / ISRAELI NEW SHEKEL (USD/ILS)

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Bank of Israel holds key rate as inflation rises, economy recovers

05/31/2021 | 09:44am EDT

JERUSALEM, May 31 (Reuters) - The Bank of Israel held its benchmark interest rate at 0.1% for a ninth straight policy meeting on Monday, citing low but rising inflation and a rapid economic recovery following a quick COVID-19 vaccine rollout.

All 17 economists polled by Reuters had said they expected the monetary policy committee to keep rates steady after doing so ever since cutting them from 0.25% more than a year ago.

Most economists do not expect a rate increase until at least 2022.

"The committee will...continue to conduct a very accommodative monetary policy for a prolonged time," the central bank said.

Israel's inflation rate moved to 0.8% in April from 0.2% in March, just below the government's 1-3% annual target range. The Bank of Israel believes the rate will reach the target with the May CPI and based on bond yields, it will rise to 1.7% in a year's time.

"Inflation expectations for the coming year from all sources continued to increase, and are within the inflation target range," it said.

While the economy contracted an annualised 6.5% in the first quarter from the prior three months, growth is expected to reach 4-6% in 2021.

Some 55% of Israeli adults have already been fully vaccinated while active COVID-19 cases across Israel have fallen to 352 by Monday. As a result, most of the economy has reopened.

"The return to normal life in Israel supports rapid growth in the coming year," the central bank said.

"However, there are still challenges to economic activity in view of the health risks in Israel and abroad and the impact to the economy, particularly the labor market."

Data published earlier in the day showed the jobless rate dipped to 6.7% in the first half of May from 7.9% in the second half of April. But the central bank noted difficulties in the labour market’s recovery process.

"The number of job vacancies continues to rise, alongside an increase in employers’ difficulty in recruiting new workers in some industries," it said, partly referring to those preferring to receive state benefits than returning to work.

The central bank said 11 days of fighting between Israel and Hamas "apparently had only a limited negative impact" on the economy while a "significant increase in consumption continued even in the industries that were particularly hard hit by the restrictions during the COVID-19 crisis."

After the decision, the shekel was flat at 3.247 per dollar. It had gained 0.4% since the prior decision on April 19.

Central bank officials have expressed reluctance to lower the key rate to zero or into negative territory despite a strong shekel and three lockdowns. Instead, they prefer to use other measures to stimulate the economy such as buying foreign currency and government and corporate bonds. (Reporting by Steven Scheer and Ari Rabinovitch; Editing by Toby Chopra and Angus MacSwan)


ę Reuters 2021
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