The Bank of Israel Monetary Committee, headed by Governor Dr. Karnit Flug, has kept the interest rate for February unchanged at 0.1%, as expected. The interest rate has been unchanged since it was cut to a historic low of 0.1% in March 2015.
In citing the reasons for keeping the interest rate unchanged the Bank of Israel stressed that, "the CPI for December was unchanged, in line with expectations. The inflation rate was negative in 2016 but is on an upward trend. The direct effect of administrative price reductions is dissipating, and energy prices remained unchanged, as measured over the preceding 12 months. The low rate of inflation reflects the effect of the appreciation, and possibly structural change and enhanced competition in the economy. Short-term inflation expectations are below the target, while longer term expectations derived from the capital market remain anchored near the midpoint of the target range."
The Bank of Israel was bullish on economic growth, "The picture of real economic activity remains positive. The Composite State of the Economy Index increased by 0.45% in December, and the Net Balance in the fourth quarter Companies Survey indicates high growth of business sector product. Foreign trade data indicate a recovery of manufacturing exports, after a prolonged decline since 2014. The picture conveyed by the labor market remains very positive, and the increase in employment and wages was led by the business sector in the past year."
On global developments, the Bank of Israel said, "The global economy continues to grow at a moderate pace. The IMF revised its growth forecast for advanced economies and for China upward, and expects a recovery in world trade in the next two years. With that, political developments in some advanced economies are likely to weigh further on trade growth. In the US, the improvement in activity continued, inflation is nearing the target and market assessments are that the federal funds rate will be increased twice in 2017. Nonetheless, there is uncertainty regarding the expected economic policy. In Europe, the recovery is less entrenched, and accommodative monetary policy continues, with political uncertainty remaining high."
Turning to the shekel, the Bank of Israel said, "From the monetary policy discussion on December 25, 2016, through January 20, 2017, the shekel strengthened by 0.2% against the dollar, while it depreciated by 0.3% in terms of the nominal effective exchange rate. The shekel has appreciated by 6.2% over the past 12 months in terms of the nominal effective exchange rate, against the background of a 6.7% appreciation vis-à-vis the euro. The level of the effective exchange rate continues to weigh on the development of goods exports."
Finally on home prices the Bank of Israel said, "Home prices continue to rise rapidly, despite a high level of unsold new homes, a decline in monthly mortgage volume, and a continued increase in mortgage interest rates."
Published by Globes [online], Israel business news - www.globes-online.com - on January 23, 2017
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