The Bank of Israel narrow monetary forum was split over cutting the interest rate for October by 25 basis points to 3%, according to the minutes of the meeting, which it published today. The committee members favored keeping the interest rate unchanged and two favoring cutting it. Governor of the Bank of Israel Prof. Stanley Fischer opted for the minority recommendation. The narrow monetary forum met on September 25-26.
The Bank of Israel stated that the main argument in favor of was based on the combination of risks from the global arena, which if realized were expected to be mainly on exports, so that lowering the interest rate would reduce the effect on GDP both via the exchange rate and via domestic demand.
The main considerations favoring leaving the interest rate unchanged were the continuing increase in rents and home prices as well as the high level of economic activity, which is apparently around full employment. Despite the increase in inventory of houses and the steps taken by the Bank of Israel and the Ministry of Finance, lowering the interest rate is liable to boost the rate of increase of home prices.
The Bank of Israel warns of the weakness of the US and European economies, and notes that the IMF cut its GDP growth forecasts for the US and Eurozone and assumes that the balance of risks is negative. The result is a slowdown in Israel's economic growth, especially exports of goods, which promoted the Bank of Israel to cut its 2012 growth forecast for Israel from 3.9 % to 3.2 %.
Published by Globes [online], Israel business news - www.globes-online.com - on October 10, 2011
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