Bank of Israel keeps October interest rate at 0.1%

Bank of Israel photo; Ariel Yeruzolimsky

Treasury assesses potential damage to Israel's US exports

Analysts had been split over whether the bank would cut the rate to zero or keep it unchanged.

The Bank of Israel Monetary Committee, headed by Governor Karnit Flug, has kept the interest rate for October unchanged at 0.1%. This rate has been unchanged at 0.1% since March when the interest rate was cut from 0.25% to its historic low of 0.1%. Analysts had been split over whether the bank would cut the rate to zero or keep it unchanged.

In citing the reasons for its decision, the Bank of Israel said that, "The rate of increase in the Consumer Price Index (CPI) in recent months has been consistent with achieving the inflation target, although it is expected that in the coming months several one-off factors will act to reduce the CPI, and against this background there was an additional decline in short-term inflation expectations this month. To date, there is no evidence that the decline in the inflation environment is a result of moderation in domestic demand. Medium and long-term (forward) expectations remained entrenched near the midpoint of the target range."

The Bank of Israel added, "Indicators of real economic activity that became available this month support the assessment that the economy is growing at a moderate rate, and that the sharp decline in the growth rate in the second-quarter growth rate derived mainly from transitory factors. Foreign trade data indicate some recovery in the third quarter, but over time the trend of lack of growth in exports, as well as in investment, is worrying. The elevated employment level and low unemployment are consistent with the increase seen in wages. The Research Department’s staff forecast for growth in 2015 was reduced by 0.4% points, to 2.6%, and was reduced by 0.4% points for 2016, to 3.3%."

"There are increasing signs of a slowdown in the growth rate of the global economy, with an emphasis on China and other emerging economies. In the US and Europe, moderate recovery continues. Global equity markets declined, with considerable volatility. Inflation in many countries continues to moderate. Monetary policy in major economies remains highly accommodative, and uncertainly continues regarding the date of an initial increase in the US federal funds rate."

The Bank of Israel continued, "From the monetary policy discussion on August 23, 2015, through September 21, 2015, the shekel weakened by about 1.1 percent in terms of the nominal effective exchange rate. However, since the beginning of the year there has been an effective appreciation of 4.8 percent. The development of the exchange rate since the beginning of year is weighing on growth of exports and the tradable sector, and is delaying the return of inflation to within the target range."

"Robust activity in the housing market continued this month, and was reflected in an especially elevated level of new home sales, and in an acceleration of the rate of price increases, which have risen by 6% over the past 12 months. Likewise, the rate of new mortgages taken out remains high. The elevated level of building starts in the past two years supports an increase in housing supply."

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