Israel opts to keep rate at 0.1%, given growth, strengthened shekel

By Marisa Wong

Morgantown, W.Va., Nov. 23 – The Bank of Israel said it will hold its interest rate steady at 0.1% for December.

The bank gave several reasons for its decision, in line with its monetary policy that is intended to return the inflation rate to the target of 1% to 3% per year. The bank’s monetary committee said in view of developments in the inflation environment, in growth in Israel and in the global economy, in the exchange rate, as well as in monetary policies of major central banks, it believes that monetary policy will remain accommodative for a considerable time.

According to a bank news release, short-term inflation expectations remained low this month and were affected by factors of a one-off nature and by the recent renewed decline in commodity prices. Medium-term (forward) expectations declined slightly after increasing in the previous month, and long-term (forward) expectations remained entrenched near the midpoint of the target range, the bank said.

The first estimate of third-quarter growth data indicates a return to the rate of growth that prevailed in the past two years, without compensation for the near-zero growth in the second quarter. The rate of growth in nondurable goods consumption was maintained, there was an acceleration in public consumption, and after a prolonged period of time there was a recovery in exports.

However, the most recent data indicate that the improvement in exports may have been transitory. The picture presented by labor market data continues to be positive. To date, the effect of the wave of violence on economic activity is moderate, the bank noted.

This month the OECD again reduced its global growth forecast, against the background of the weakness in world trade and the slowdown in developing economies, the committee said. Global financial market expectations are that the U.S. Federal Reserve will begin to increase the Federal Funds rate soon, but that in Europe and other major economies, monetary accommodation will be enhanced.

From the monetary policy discussion on Oct. 25 through Nov. 20, the shekel strengthened by about 1.6% in terms of the nominal effective exchange rate, as the shekel was stable against the dollar and appreciated relatively sharply against the euro, the bank highlighted.

Since the beginning of the year, there has been an effective appreciation of 7.5%. The development of the exchange rate since the beginning of year is weighing on growth of exports and the tradable sector and is delaying the return of inflation to within the target range, the committee said.

The volume of new mortgages taken out remains elevated, as do new home sales and the stock of homes available for sale. Home prices have increased by 6.6% over the past 12 months. However, prices have been stable over the past two months, the bank noted.

The committee believes that the risks to achieving the inflation target and to growth remain high.

The bank said it will continue to monitor developments in the Israeli and global economies and in financial markets and will use tools available to it to achieve its objectives of price stability, encouragement of employment and growth and support for the stability of the financial system. The bank said it will keep a close watch on developments in the asset markets, including the housing market.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.