BoI will probably loosen again if the ILS strengthens

The Bank of Israel (BoI) kept its base rate on hold today at 0.10%. In its statement, the MPC cited ILS appreciation of 1.9% during the past month as a factor. 

While deflation continued, near-term inflation expectations actually increased. It also pointed to rising home prices and a mixed growth picture in Q1 15. The BoI noted that global central banks had eased monetary policy further this month.

Barclays Capital notes ....

• In our view, inflation is set to begin a gradual climb, starting in Q2 15, but will not turn positive until Q4 15 when base effects become very strong. 
  
  
• The BoI is primarily concerned about the ILS. It cut last month because of ILS appreciation during 2015. The ILS subsequently sold off after the cut and due to BoI FX intervention. Looking ahead, we believe that if the ILS strengthens, the BoI will probably loosen again via a combination of FX intervention through unsterilised purchases of USD, possibly purchases of government securities, and/or cutting rates to zero and possibly instituting negative interest rates. In our view, the BoI is determined to weaken the ILS and will do what it takes.