Bank of Israel further lowers interest rate to 1¼%, effective June

By Marisa Wong

Madison, Wis., May 29 - The Bank of Israel said it decided to reduce the interest rate for June by 25 basis points to 1¼%.

Just two weeks ago, the bank's monetary committee made an unscheduled decision to reduce the interest rate by 25 bps to 1½%.

The committee was aiming to narrow gaps between the bank's interest rate and the rates in major economies worldwide, in order to weaken the forces behind appreciation of the shekel.

The bank noted that the latest reduction is consistent with its interest rate policy, which is intended to contain the inflation rate within the price stability target of 1% to 3% a year over the next 12 months.

The bank reported that the Consumer Price Index for March increased by 20 bps and for April by 40 bps, both months in line with forecasts. Over the past 12 months, the CPI increased by 80 bps, below the lower bound of the inflation target range.

The main factors contributing toward a decline in the CPI in the past year were the appreciation of the shekel, declines in energy and cellular communications prices and expansion of the Free Education Law to children from the age of three. On the other hand, main contributions to an increase in the CPI over the past year were prices of food and housing and increased taxation and electricity prices.

Inflation expectations from various sources were around 1.7% at the time of the unscheduled interest rate reduction, when the committee also implemented a plan to purchase foreign exchange in order to offset the effect of gas production.

After the committee's decision and the April CPI were published, inflation expectations increased slightly and are now slightly below the midpoint of the target range. Inflation expectations for terms of two years and longer range from 2.3% to 2.5%.

The expected increases in VAT and in electricity prices are expected to lead to higher prices in coming months, while the recent declines in prices of commodities and energy are expected to push for lower prices. Consequently, projections of the bank's interest rate one year from now range between 1.3% and 1.45%.

The bank said its decision on the interest rate for July will be published on June 24.

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