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

By Marisa Wong

Morgantown, W.Va., Jan. 25 – The Bank of Israel said it will hold its interest rate steady at 0.1% for February.

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, and there were declines in medium-term (forward) expectations as well. Long-term (forward) expectations are still entrenched above the midpoint of the target range, the bank said.

Further price reductions initiated by the government – in public transportation, water and automobile insurance – are expected to be reflected in the CPI for January and February.

Data available this month point to economic activity continuing its moderate improvement in the fourth quarter of 2015 and the effect of the security situation on economic activity remaining moderate. The job vacancy rate continues to increase, and together with an increase in wages, reflect a positive picture in the labor market, the release said.

In the past month, global financial markets declined amid high volatility, the bank commented. The picture of activity remains positive in Europe, mixed in the United States and still weak in emerging markets. The IMF and the World Bank reduced their 2016 and 2017 forecasts for global growth and world trade. The ECB expressed readiness to further enhance the monetary accommodation, and market expectations are that the rate of increase in the Federal Funds rate will be lower than that expected last month, the release said.

The bank reported that from the monetary policy discussion on Dec. 27 through Jan. 22, the shekel weakened by about 2% against the dollar and by about 0.4% in terms of the nominal effective exchange rate. Over the past 12 months there has been an appreciation of 6.6% in terms of the nominal effective exchange rate, and its level continues to weigh on growth of exports and the tradable sector, the bank said.

In recent months, the increase in home prices accelerated, and they rose by 7.6% over the past 12 months. The volume of new mortgages taken out remains high. The elevated level of activity in the construction industry is expected to continue to contribute to increasing supply, the bank noted.

In sum, the bank’s monetary committee believes that the risks to achieving the inflation target have increased, and the risks to growth remain high.

The bank reiterated that 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.

© 2015 Prospect News.
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