The interest rate reduction rate will be influenced by the rapid narrowing of the gap between shekel and foreign currency interest rates, especially the dollar, and its impact on the structuring of the public's asset and liability portfolios. The economists of Bank of Israel's research department drew this conclusion in the economic review published today.
The review states that the current interest rate gap is the lowest for the past two years, following the rise in euro and US interest rates. Yet despite the narrowing of the interest rate gap, the rate of import of capital into Israel has now slowed.
The data shows that the real interest rate expected to apply to Bank of Israel sources still remains at a high level of 7.2%, despite the gradual reduction of the nominal interest rate. Incidentally, the real short term interest rate, net of actual inflation, reached 12.5% in the said period.
Bank of Israel data also show that in the period under review, inflation expectations for the next twelve months fell from 6.2% in 1999 to 2.5% in March 2000. At the same time, private forecasters and banks also updated their inflation forecasts from 5.1% to 3.4% (respectively).
Published by Israel's Business Arena on 14 May 2000