25 of 27 analysts in a Bloomberg survey predict that the Bank of Israel Monetary Committee will keep the central bank's key interest rate unchanged for August, at 2.25%, in its decision tomorrow, while two analysts predict a cut of 25 basis points. Last month, the Bank of Israel cut its interest rate for July by 25 basis points.
Poor economic data continued to pour in during July, including an unexpected 0.3% drop in the Consumer Price Index (CPI) for June, raising concerns that the economy is headed for a recession. The CPI figure came on top of a drop in exports, a slowdown in economic growth, a drop in sales by retail chains, and other data.
At the same time, home prices are still rising, which makes it more difficult for the Bank of Israel to cut the interest rate. According to the Central Bureau of Statistics, home prices rose by 0.7% in May and by 2.2% in January-May.
Governor of the Bank of Israel Prof. Stanley Fischer has hinted that the Bank of Israel will find it difficult to cut the interest rate if the budget deficit increases. The remark was made in response to Prime Minister Benjamin Netanyahu's decision to double the deficit target for 2013 from 1.5% of GDP to 3%. The higher target is also considered problematic because of the crisis in Europe and slowdowns in the US and China. The 2013 budget deficit is projected to reach 3.5-4% of GDP, according to some estimates.
In the minutes of the interest rate decision for July, a member of the Bank of Israel's management, who supported keeping the interest rate unchanged, said that until the budget was clarified, the Bank of Israel should hold off cutting the interest rate.
Leader Capital Markets macroeconomist Yonatan Katz believes that the Bank of Israel will keep the interest rate unchanged at tomorrow's meeting, because of the uncertainty about fiscal policy and worries about a renewed rise in home prices. He adds, however, "At least one more interest rate cut is likely in the coming months, because of the slowdown in global activity."
Published by Globes [online], Israel business news - www.globes-online.com - on July 22, 2012
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