Israel opts to keep interest rate at 1% with inflation still low

By Marisa Wong

Madison, Wis., Nov. 25 - The Bank of Israel said it decided to maintain the interest rate for December at 1%. It last lowered the rate by 25 basis points, to 1% from 1¼%, in October.

The bank said it arrived at this decision after taking into consideration inflation, which remains low despite the greater than expected 0.3% increase in the Consumer Price Index for October.

The 1.8% rate of inflation over the past 12 months was near the midpoint of the target, and the bank sees a decline in inflation expectations for the coming year.

Also, in the third quarter the growth rate declined, and weakness was seen in manufacturing and exports, but initial indicators for the fourth quarter point to some recovery.

Likewise, the decline in unemployment and the increase in the employment rate continued in the third quarter, but the increase in employment was focused in public services, in contrast to the virtual standstill over time in business sector employment, the bank said.

Over the month since the previous interest rate decision, the shekel weakened against the dollar by about 0.9%, but the shekel's weakness was more moderate than that of most currencies against the dollar. The shekel strengthened by about 0.5% against the effective exchange rate.

Also affecting the bank's interest rate decision is the continued increase in housing prices, along with a rapid pace of new mortgages taken out.

In addition, monetary policy in major economies remains very accommodative. Despite the apparent improvement in the U.S. labor market, there is still uncertainty regarding the date that a tapering process will begin. The European Central Bank reduced its interest rate this month by 0.25% and reiterated its commitment to accommodative policy for an extended period.

The Organization for Economic Cooperation and Development revised its global growth forecast downward, primarily due to expected additional moderation in emerging market economies, while its forecast for overall OECD growth remained virtually unchanged.

The bank said it will publish the minutes of the monetary discussions prior to the interest rate decision for December on Dec. 9.

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