As expected, the Bank of Israel announced today that it was leaving its key interest rate at 0.1% for January.
The decision of the Bank of Israel's Monetary Committee comes against a background of appreciation of the shekel against the basket of currencies in the past month (against the US dollar, the shekel has appreciated by 1.3%) and a surprise fall in the Consumer Price Index in November. It also comes two weeks after the US Federal Reserve raised its interest rate for the first time in a year. The Federal Reserve also said that it expected three interest rate hikes in 2017 because of a projected rise in inflation pressures.
Alongside the interest rate decision, the Bank of Israel Research Department published revised inflation, interest rate and growth projections. As in the previous forecast, the central bank sees the inflation rate reaching 1% (the lower limit of the target range) by the fourth quarter of 2017. The Research Department estimates that the interest rate will rise to 0.25% during the fourth quarter of 2017 and to 0.5% in the second half of 2018.
The Bank of Israel has raised its growth forecast for 2016 from 2.8% to 3.5%, and from 3.1% to 3.2% for 2017, following higher than expected growth in the third quarter of this year. In 2018, growth is expected to be 3.1%. The Bank of Israel says that growth will revert to being export-driven and less reliant on private consumption, which has been the Israeli economy's main engine in recent years.
In her remarks at the press conference that followed the interest rate announcement, Governor of the Bank of Israel Karnit Flug said, "The picture being conveyed to us at this time is that the economy continues to grow at a solid pace and the labor market is strong, while the inflation environment remains very low."
Flug noted that "in recent months, the direct effects of administrative price reductions and the decline of energy prices on inflation have begun to dissipate," and that "the annual rate of inflation has begun to increase slowly, though the increase halted in the November CPI reading."
On the housing market, Flug said, "There are trends moving in opposite directions. The pace of building starts returned to increase, and in the past year, according to updated figures, there were more than 50,000 building starts; the supply of unsold homes is at record levels, and the number of transactions is declining, with an emphasis on purchases by investors. The increase in mortgage interest rates led to a moderate but continued decline in monthly volume of new mortgages. All these are forces that are expected to act toward moderation of prices, but so far prices continue to increase at a relatively rapid rate. The duration of construction becoming longer, and building completion data not maintaining the pace of building starts, is troubling, and the government will need to continue working intensively to persist in increasing supply."
As for the economic outlook and the prospect for interest rates, Flug said, " While economic activity in Israel is becoming entrenched, and the labor market continues to show strength, the inflation environment is still low and the inflation rate is markedly lower than the target. Political processes in various countries worldwide continue to impart uncertainty regarding expected developments in the global economy, and the divergence in monetary policy between the US and other major economies is widening. Against the background of these factors, the appreciation in the effective exchange rate is continuing.
"The picture that is becoming apparent is that in terms of real activity, the Israeli economy’s business cycle is more in line with that of the US economy; in contrast, the picture of inflation in Israel is similar to that in Europe. It is important to note that the Bank of Israel’s monetary policy does not necessarily move in line with what is occurring in a specific economy, but is established through analysis of the range of developments and their impact on the Israeli economy and financial markets in Israel.
"The Monetary Committee assesses that monetary policy will remain accommodative for a considerable time, in order to support the return of inflation to within the target range. The policy of foreign exchange purchases will continue, as necessary, to support the attainment of policy goals."
Published by Globes [online], Israel business news - www.globes-online.com - on December 26, 2016
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