Central Banker Who Shocked Israel Defends Her Surprise Rate Hike

&copy Bloomberg. Nadine Baudot-Trajtenberg, second from left. Photographer: Ariel Jerozolimski/Bloomberg

(Bloomberg) — The outcome of the lone meeting Nadine Baudot-Trajtenberg chaired at the Bank of Israel will resonate long after her five-year term as deputy governor ends this week.

Last November, Baudot-Trajtenberg as acting governor led the decision to raise interest rates for the first time since 2011. Although economists have questioned the move, Baudot-Trajtenberg said the decision was “completely coherent” with domestic economic data that has come out since, even as overseas the picture has darkened.

“In terms of the domestic activity, it’s pretty much on track,” she said in an interview Thursday, her last day in office. “The global monetary environment and the global economic activity, both these have changed I would say for the worse.”

Israel’s central bank has stood pat in the two meetings since then, with new Governor Amir Yaron signaling that any future tightening will be “gradual and cautious.” Economic growth looks set to stagnate this year, while inflation has rebounded slightly, moving back within the bank’s target range of 1 percent to 3 percent.

The central bank’s research department predicts inflation will edge up to 1.3 percent by the end of 2019, with the benchmark rate rising to 0.5 percent by the third quarter from its current 0.25 percent.

She does see some risks on the horizon. Israel is vulnerable to a brewing global trade war, she said, though it’s not clear how much. A downturn in equity markets also could hurt the country if it causes savings to shrink, or spurs a change in risk appetite that scares investors away from Israeli high tech.

“Funding has been quite generous for the past few years because the risk taking was very high and the interest rate environment very low,” she said. “If risk appetite changes, then you know our ability to raise funds for those very risky enterprises might have an impact.”

Baudot-Trajtenberg thinks the new governor has a “very deep understanding of financial markets,” as evident in his past research and his manner of approaching issues. “I think that’s a very strong element to bring to a central bank,” she said.

Yaron’s preference for steering inflation toward the 2 percent midpoint of the target range — a level Israel last reached in 2013 — “isn’t a different policy,” she said. It also doesn’t mean the central bank will postpone any rate move until inflation reaches that threshold, she said.

“It reflects the fact that for a long time our minimum request was to be entrenched within the range,” she said. “But if we want our tool to be more effective, then we should be aiming for something like the mid range.”

Baudot-Trajtenberg said she still wasn’t sure of her future plans.

“It’s inappropriate to think about what you’re going to do next when you’re in the central bank,” she said.

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