The Bank of Israel Monetary Committee headed by Prof. Amir Yaron has, as expected, left the September interest rate unchanged at 0.25%. The decision was no surprise because Yaron has said earlier this month that the rate would not rise in the near future. But with concerns growing of a global concession, some analysts feel the rate, which was hiked last November before Yaron took office, could soon be cut.
There was a new tone in the bank's statement which was more aggressive about future use of monetary policy instruments. "The Monetary Committee's assessment is that in view of the turnaround in the inflation environment in Israel and in the monetary policies of major central banks, the slowing in the global economy, and the continued appreciation of the shekel, the interest rate will not be increased for an extended period. Moreover, if necessary, the Committee will take additional steps toward making monetary policy even more accommodative in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and to support economic activity."
In citing its reason's for today decision, the Bank of Israel said, "Since the previous interest rate decision, the inflation environment has shifted downward. The CPI readings for June and July were markedly lower than expected, and the inflation rate in the past 12 months is 0.5%. Inflation excluding energy and fruits and vegetables is 0.9%. Most of the negative contribution to the CPI is from the fruit and vegetables component, which is highly volatile, and from components affected by the appreciation of the shekel and the decline in energy prices. Short- and medium-term inflation expectations declined, with one-year expectations ranging around the lower bound of the target range, but long-term expectations remained anchored near the midpoint of the target range."
The Bank of Israel added, "The shekel strengthened by 3% in terms of the nominal effective exchange rate since the previous interest rate decision, and by 8.7% since the beginning of the year. If the appreciation persists, it will be harder for a more extended period to return inflation to the target range."
On the Israeli economy, the Bank of Israel said, "Economic activity continues to grow at close to its potential rate, and thus far it seems that activity in Israel is not being adversely affected by the negative global sentiment. Private consumption excluding durable goods and public consumption drove growth in the second quarter, and the trend of expansion that has characterized exports in the past two years continued, led by services exports. Initial data for the third quarter support the assessment that growth is continuing at around the potential rate. The labor market remains tight."
On the world economy, the Bank of Israel concluded, "The risks to the global economy have become more severe since the last interest rate decision, mainly in view of the worsening "trade war". Interest rates were lowered in the US and other economies, and further reductions are expected. In Europe, further monetary accommodation is expected."
Published by Globes, Israel business news - en.globes.co.il - on August 28, 2019
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