Bank of Israel opts to reduce interest rate by 25 bps as CPI declines

By Tali Rackner

Norfolk, Va., Feb. 24 - The Bank of Israel said it decided to reduce the interest rate for March by 25 basis points to ¾%. It last lowered the rate by 25 bps to 1% from 1¼% in October.

The bank said the consumer price index declined by 0.6% in January, more than forecasters' projections, which were for a decline of 0.2%, on average. The surprise to the downside derived mainly from two components -food, which declined by 0.8%, and owned dwellings services, which declined by 0.9%.

The rate of inflation over the preceding 12 months was 1.4%, compared with 1.8% over the 12 months ending in December, the bank said.

Private forecasters' inflation projections for the next 12 CPI readings declined slightly after publication of the CPI reading for January, and average 1.6%. Inflation expectations derived from the capital market remain at 1.9%, and expectations for the next 12 CPI readings derived from banks' internal interest rates remained at 1.4%.

New data indicate that the economy is continuing to grow at a moderate pace. According to the initial estimate of National Accounts data for the fourth quarter of 2013, GDP increased by 2.3% and business sector product increased by 1.6%.

From Jan. 26 through Feb. 21, the shekel weakened by 0.8% against the and by about 0.9% against the euro, while the dollar and euro weakened against most major currencies worldwide.

Also in the last month, the Tel Aviv 25 Index declined by 1.6%, a lower return than the trend in advanced economies.

Home prices increased by 8.1% in the past year, and the increase in the number of transactions and the high volume of mortgages being granted continue. There is a continued trend of improvement in the risk characteristics of new mortgages.

The Bank of Israel said it will continue to monitor developments in the Israeli and global economies and in financial markets, particularly in light of the continuing uncertainty in the global economy.

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