Bank of Israel Governor Prof. Stanley Fischer has left the interest rate unchanged at 1.5% for the third consecutive month.

In its announcement the Bank said that its decision to leave the rate unchanged was due global uncertainty especially in Europe.

The bank said its decision, "is consistent with the gradual process of returning the interest rate to a more 'normal' level, intended to position inflation firmly within the target range, and to contribute to the further recovery of economic activity, while supporting financial stability. The path of the interest rate will be determined in accordance with the inflation environment, the entrenchment of growth in Israel and globally, the rate at which the major central banks increase their interest rates, and in light of developments in the exchange rates of the shekel. At the current level of the interest rate, monetary policy continues to be expansionary."

On inflation the bank added, "The trend of the inflation rate, measured over the past twelve months, has been downwards for several months. Since the beginning of the year inflation has been below the seasonal trend consistent with the middle of the target range for 2010. According to Bank of Israel assessments and forecasters' predictions, the retrospective twelve-month inflation rate will continue to decline to the middle of the range, or even below it, in the next few months. According to twelve-month forward inflation expectations, both of forecasters and those calculated from the capital market, in another year the inflation rate will return to the upper part of the inflation target range, with a cumulative interest-rate increase of between 1 and 1.5% in the next twelve months."

The bank continued, "After a period of a year of relatively rapid growth, some data have turned negative, leading to greater uncertainty about the persistence of this trend. Preliminary data from the Companies Survey for 2010: show that economic activity continues to expand, albeit at a somewhat slower pace, with indications of weakness in exports for the next quarter, in both the manufacturing and the services sectors. The main negative indicators are: those for domestic activity¬, export data and the Purchasing Managers Index; and for the global economy, developments in Europe and the US."

The bank also mentioned low interest rates worldwide as an influence. The statement said, "The interest rates of the central banks of the leading advanced economies are very low, and in view of the increased concern over possible negative developments in the global economy and the continued moderation of inflation expectations, these interest rates are expected to remain low for significantly longer than originally anticipated. In addition, in light of recent developments, some of the unconventional instruments of monetary accommodation have been reintroduced."

Published by Globes [online], Israel business news - www.globes-online.com - on June 28, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010