The Bank of Israel Monetary Committee has kept the interest rate for March unchanged at 0.1%, as expected. In December, Bank of Israel Governor Dr. Karnit Flug said that the rate was unlikely to rise in the near future. The interest rate has been unchanged since it was cut to a historic low of 0.1% last March.
In citing the reasons for keeping the rate unchanged, the Bank of Israel said, "The inflation environment remained low this month as well, against the background of price reductions initiated by the government and low energy prices. Inflation expectations up to three years forward, which are slightly below the lower bound of the target range, are influenced by the current low level of inflation and by measures to reduce prices in the economy. Medium- and long-term expectations are anchored within the target range. Further initiated price reductions are expected to be reflected in the next few CPI readings as well. In contrast, wage increases in the economy are expected to support a return of the inflation rate to within the target range."
The Bank of Israel added, "The indicators of real economic activity that became available this month point to a growth rate similar to that of previous years, and to some acceleration of growth in the fourth quarter of 2015. According to the first estimate of National Accounts data, GDP grew by 3.3% in the fourth quarter, with an increase in all uses except for current consumption. Initial indicators for the first quarter of 2016 point to a mixed picture. The effect of the security situation on economic activity remains moderate, and is reflected mainly in tourism. The picture conveyed by labor market data remains positive, and is reflected in a high level of employment with a continued increase in wages, despite some moderation in the job vacancy rate.
On global developments, the Bank of Israel said, "This month, the trend of moderation in global economic activity continued, in particular a slowdown in developing economies and in world trade, and with a further worsening of financial conditions against the background of concern over the stability of banks, particularly in Europe. The markets ascribe a low probability to an additional interest rate increase in the US this year, and a number of central banks have enhanced monetary accommodation."
On the shekel, the Bank of Israel said, "The nominal effective exchange rate has been relatively stable in recent months. From the monetary policy discussion on January 24, 2016, through February 19, 2016, the shekel strengthened by about 1.5% against the US dollar and by 0.3% in terms of the nominal effective exchange rate. Over the past 12 months there has been an appreciation of 2.8% in terms of the nominal effective exchange rate, and its level continues to weigh on growth of exports and the tradable sector.
Finally, on Israeli home prices the Bank of Israel said, "In recent months, the increase in home prices accelerated, and they rose by 8% over the past 12 months. The volume of new mortgages taken out remains high, despite the increase in mortgage interest rates in recent months. The elevated level of activity in the construction industry is expected to continue to contribute to increasing supply."
Published by Globes [online], Israel business news - www.globes-online.com - on February 22, 2016
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