Israel keeps rate at 0.1%; short-term inflation expectations decline

By Marisa Wong

Morgantown, W.Va., Dec. 29 – The Bank of Israel said it will hold its interest rate steady at 0.1% for January.

The bank gave several reasons for its decision, in line with its monetary policy that is intended to return the inflation rate to the target of 1% to 3% per year. The bank’s monetary committee said in view of developments in the inflation environment, in growth in Israel and in the global economy, in the exchange rate, as well as in monetary policies of major central banks, it believes that monetary policy will remain accommodative for a considerable time

According to a bank news release, short-term inflation expectations declined again this month, due to renewed declines in fuel prices worldwide and additional price reductions initiated by the government. Annual inflation is only expected to return to the target range at the beginning of 2017. Medium-term (forward) expectations are entrenched within the target range, the bank said.

Data available this month point to the recent period’s growth environment, around 2.5%, continuing in the fourth quarter as well, and the effect of the security situation is limited mostly to tourism, the release said.

Recent data on exports were positive but do not make up for the declines in previous months. Preliminary data indicate a slight improvement with respect to the third quarter. Despite a slight decline in very recent data on the employment rate, the picture presented by labor market data continues to be positive.

The forecast for GDP growth in 2016 was revised downward, to 2.8%, compared with 3.3% in the September forecast, the bank noted.

The picture of the global economy continues to show some improvement in activity in advanced economies, as opposed to the continued slowdown in emerging markets.

From the monetary policy discussion on Nov. 22 through Dec. 25, the shekel weakened by about 0.4 against the dollar and in terms of the nominal effective exchange rate, and by 2.9% against the euro. Since the beginning of the year there has been an effective appreciation of 7.1%, the bank reported.

The development of the exchange rate since the beginning of year is weighing on growth of exports and the tradable sector and is delaying the return of inflation to within the target range, the bank said.

This month, the increase in home prices resumed, and they have increased by 6.9% over the past 12 months. The volume of new mortgages taken out remains high. In the third quarter, the elevated level of activity in the construction industry continued, and this is expected to continue to contribute to increasing supply.

The bank said it will continue to monitor developments in the Israeli and global economies and in financial markets and will use tools available to it to achieve its objectives of price stability, encouragement of employment and growth and support for the stability of the financial system. The bank said it will keep a close watch on developments in the asset markets, including the housing market.

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