Bank of Israel keeps March rate unchanged

Karnit Flug

As the dollar hits a 30-month low against the shekel, many in the market believe the Bank of Israel is powerless to halt the strengthening shekel.

The Bank of Israel Monetary Committee, headed by Governor Dr. Karnit Flug, has kept the interest rate for March unchanged at 0.1%. The interest rate has been unchanged since it was cut to a historic low of 0.1% in March 2015.

As the dollar hit a 30-month low of NIS 3.679/$ against the shekel today and the euro hit a 15-year low of NIS 3.894/€, many in the market believe the Bank of Israel is powerless to halt the strengthening of the shekel. After the unchanged interest rate was announced, shekel-dollar exchange rate fell a further 0.45% to NIS 3.663/$ and the shekel-euro exchange rate fell a further 0.26% to NIS 3.884/€. 

Citing the major reasons for its interest rate decision, the Bank of Israel said, "From the monetary policy discussion on January 22 2017, through February 24 2017, the shekel strengthened by 3% against the dollar, and it appreciated by 2.1% in terms of the nominal effective exchange rate. The shekel has appreciated by 7.4% over the past 12 months in terms of the nominal effective exchange rate. The level of the effective exchange rate continues to weigh on the development of goods exports.

On inflation, the Bank of Israel said, "The CPI for January declined by 0.2%, in line with expectations. The trend of moderate increase in annual inflation continues, impacted primarily by a change in the trend of energy prices and by the dissipating of the direct effect of administrative price reductions, and the year over year inflation rate is 0.1%. Short-term inflation expectations are below the target, but forward expectations for medium terms, from the third year onward, are within the target range, and longer term expectations are anchored near the midpoint of the target range.

On the Israeli economy, the Bank of Israel said, "Real economic activity continues to improve. According to the initial estimate, GDP growth in the fourth quarter of 2016 was particularly high, impacted by an atypical increase in vehicle imports. Net of this increase, it may be assessed that the growth rate was slightly above 3%, with a change in the composition of uses-the growth rate of private current consumption moderated markedly, while there was strong growth of exports. The picture conveyed by the labor market remains very positive.

On the global economy the Bank of Israel added, "Moderate growth continues in major advanced economies, with a continued trend of improvement in emerging markets. Positive momentum continues in financial markets, although the uncertainty regarding political developments continues to be a source of risk to continued growth. Inflation in most markets is approaching its target, but in Europe and Japan very accommodative monetary policy continues. Market assessments are that the federal funds rate will be increased twice in 2017."

Finally, on home prices, the Bank of Israel concluded, "There was a sharp decline in home prices in the most recent data, in parallel with a decline in the number of transactions. These figures are consistent with the decline in monthly mortgage volume, the increase in mortgage interest rates, and efforts to increase supply. However, it is too early to assess, based on a single figure, if the trend in home prices is changing."

Published by Globes [online], Israel business news - www.globes-online.com - on February 27, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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