BoI cuts interest rate, raises growth forecast

In a surprise move, the Bank of Israel has lowered the January interest rate to 1.75%, and raised the 2013 growth forecast to 3.8%.

The Bank of Israel's monetary committee has lowered the interest rate for January by 25 basis points from 2% to 1.75%. The decision is a surprise with two thirds of analysts polled by "Bloomberg" over the weekend expecting the Bank of Israel to leave the interest rate unchanged.

The Bank of Israel also unexpectedly lowered the November interest rate by 25 basis points but kept the rate unchanged last month at 2%.

A senior Bank of Israel official told "Globes" that "this was a one-time decision and does not reflect a new trend."

In explaining its decision, the Bank of Israel spoke of economic weakness and slowdown in growth, yet raised its growth forecast for 2013 due to the imminent flow of Tamar gas. "Indicators of real economic activity continue to point to weakness, and further moderation in the rate of growth is likely. In addition, the shekel's recent strength may make it more difficult for the economy to deal with the challenges it faces.

The Bank of Israel has also lowered its growth forecast. This month, the research department updated its growth forecast for the coming year. Excluding the impact of the start of natural gas production from the new field, Tamar, growth in 2013 was revised downward to 2.8%, compared with 3% in the previous forecast. The forecast including natural gas production is for 3.8% growth. It should be noted that gas production requires only very small inputs of labor, and that accordingly, the expected development of employment and unemployment is determined largely by the growth rate of GDP excluding (rather than including) gas production.

The Bank of Israel also cited the lower than expected inflation rate as one of the main considerations underlying its decision. "The development of actual prices, inflation expectations for the year ahead, and recent months' surprises to the downside in the Consumer Price Index (CPI) indicate a continued decline in the inflation environment, and apparent weakness in domestic demand as well. Inflation over the previous 12 months was below the mid-point of the target range, and inflation expectations for the year ahead are near the midpoint of the target range. Commodity prices in general, and oil prices in particular, declined slightly this month; these are expected to have an impact on domestic prices in the future."

The Bank of Israel also mentioned global risks such as uncertainty over the US "fiscal cliff," and the Euro debt crisis.

The Bank of Israel has adopted a "wait and see" approach to continued rises in home prices. "Home prices continued to increase in September-October. However, it is too early to assess the impact on home prices of the LTV (loan-to-value) ratio limitations, which were imposed by the Supervisor of Banks and went into effect at the beginning of November."

Published by Globes [online], Israel business news - - on December 24, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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