Bank of Israel keeps interest rate unchanged

Karnit Flug

Despite disappointing growth in Israel and the turmoil on global stock markets, the September rate remains at 0.1%.

The Bank of Israel Monetary committee has kept the interest rate for September unchanged at its historic low of 0.1%. Some analysts had predicted that due to Israel's slowdown in growth and the plunging stock market due to the crisis in China, the Monetary Committee headed by Governor Dr. Karnit Flug would cut the rate to zero.

In citing the reasons for its decision, the Bank of Israel said that, "The rate of increase in the CPI in recent months has been consistent with the inflation target. However, short-term inflation expectations declined sharply this month, against the background of decreases in energy and commodity prices in the past two months and the scheduled reduction in electricity prices; expectations are below the lower bound of the target range. Medium-term and long-term (forward) expectations remained entrenched near the midpoint of the inflation target range."

Discussing the domestic economy the Bank of Israel said, "Indicators of real economic activity are volatile but point to some decline in the growth environment, relative to the 2.53% growth range of the past two years, with a decline in exports against the background of decreased world trade, and continued growth of current consumption. Labor market data indicates that the unemployment rate is low, and the job vacancy rate is relatively high, with employment growth primarily in the services industries.

On the global economy, the Bank of Israel said, "Some slowdown is apparent in the global growth rate with an increase in the level of risk. Slowing growth in China is negatively impacting economic activity in numerous countries. In recent days there have been sharp declines in global financial markets, and the expected path of the US federal funds rate, as derived from capital markets, is lower than it was last month."

On the shekel, the Bank of Israel said, "From the monetary policy discussion on July 26, 2015, through August 21, 2015, the shekel weakened by 1.3% in terms of the nominal effective exchange rate, but it has appreciated by 5.8% for the year to date. Even with the depreciation this month, the development of the exchange rate since the beginning of the year weighs on the growth of exports and of the tradable sector, and is delaying the return of the inflation rate to within the target range."

On home prices, The Bank of Israel added, "Robust activity in the housing market continued this month as well, and was reflected in an especially elevated level of new home sales, and in an acceleration in the rate of increase of home prices, which have increased by 4.4% in the past 12 months. Likewise, the pace of new mortgages taken out remains high."

The Bank of Israel concluded, "The Monetary Committee is of the opinion that the risks to attaining the inflation target, and to growth, have increased. The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets. The Bank will use the tools available to it and will examine the need to use various tools to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market."

Published by Globes [online], Israel business news - www.globes-online.com - on August 24, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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