The Bank of Israel announced this evening that the interest rate for September will remain unchanged at 3.25%. In explaining its decision, the Bank of Israel cited lower inflationary expectations, lower growth, a slowing in the rise of home prices, and "the reversal in Europe and the US."
The decision by Governor of the Bank of Israel Prof. Stanley Fischer to leave the interest rate unchanged for the fourth consecutive month was in line with market expectations. A survey of analysts yesterday by "Bloomberg" found that 20 out of 21 forecast the rate would remain unchanged.
In its announcement about the unchanged rate, the Bank of Israel cited lower inflationary expectations and said, "Inflation expectations - those derived from the capital market and predictions of the forecasters - declined significantly last month and are currently 2% and 2.5% respectively. The current forecast of the Bank of Israel Research Department is that inflation will enter the target range towards the end of 2011, as opposed to the middle of 2012 in the previous forecast. The July CPI was surprisingly low, following four months when the seasonally adjusted CPI inflation rates were in line with the target inflation range. Nevertheless, inflation over the previous twelve months, 3.4%, is still above the target range."
On slower GDP growth the Bank of Israel said, "The rate of growth in the second quarter was slower than in the first, mainly due to the slackening of global demand and its effect on exports, whereas domestic demand continued to increase. Developments since the previous interest rate decision indicating a negative turnaround in economic activity in the US and the eurozone, together with the geopolitical risks, are likely to affect economic activity in Israel. Notwithstanding, the relatively good present state of the Israeli economy will enable it to withstand these shocks with a relatively moderate impact."
Discussing the real estate market the Bank of Israel continued, "The rate of increase in home prices over the last twelve months continues to be high, but moderated for the second month in succession, and in June reached 12.5%. With that, the interest rate increases, measures taken by the Bank of Israel in the mortgage market, and measures taken by the Ministry of Finance regarding real estate taxation, together with the continued increase in building starts, are expected to continue and to have a moderating effect on house prices during the coming year."
Finally regarding the global outlook the Bank of Israel concluded, "As a result of the reversal in the US and Europe, the markets are not pricing in an increase in the interest rate during the coming year by any of the central banks of the main advanced economies. The Federal Reserve announced this month that it would leave its interest rate at its near zero level until mid-2013 at least."
Published by Globes, Israel business news - www.globes-online.com - on August 29, 2011
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