The Bank of Israel today published the minutes of the latest Monetary Committee meeting, which decided to cut the interest rate for July 2012. Five committee members voted to cut the interest rate by 25 basis points, and one member voted to keep the interest rate unchanged at 2.5%.
The Monetary Committee meeting focused on the risks to the Israeli economy from global economic conditions, particularly the situation in Europe, inflation and inflation expectations in Israel, Israel's fiscal policy, and the housing market.
Committee members noted that despite the decline in the risk of an immediate crisis, which would derive from Greece's exit from the eurozone, several indicators became available which pointed to deterioration in the global situation. It appears that growth rates in several countries around the world, even those outside Europe, declined. Global growth forecasts at a number of investment houses were revised downward.
Monetary Committee members assessed that a continued decline in growth rates in the world is liable to have a negative impact on Israel's economic growth, primarily via a possible blow to exports. Committee members assessed that, in recent months, the economy has continued to grow at an annual rate of around 3%. One member said that data that became available this month indicate that the growth rate continued in the second quarter as well. With that, concerns were raised about the continuation of the current rate of growth due to the decline in growth rates of business sector product, and concern for continued growth of exports.
Participants noted that inflation over the previous 12 months was below the middle of the target range of 1-3% per year, and that the surprise in the CPI for May led to a relatively sharp decline in expectations for inflation in the coming 12 months.
Committee members discussed the increase in the government's deficit for 2012, and the need for measures to reduce expenditure ahead of the 2013 budget in order to ensure the credibility of fiscal policy and continued decline in the debt to GDP ratio. The importance of tax rate increases was emphasized. At the same time, committee members said that the rate of growth of government expenditures derived from the automatic pilot needs to decline in order to meet the expenditure rule, and that tax and expenditure measures are required to improve the ability to deal with possible crisis developments. "Although an indirect tax increase will apparently increase the price level in the economy, the increase in prices is expected to be a one-time phenomenon," the protocol states.
The increase of 1.4 percent in the index of home prices for March-April, the increase in new mortgages granted in May and the slight decline in building starts (which remain at a high level) were considered in a discussion on the effect of monetary policy on the housing market. The assessment in the discussion was that due to the weakness of the pass-through mechanism from the Bank of Israel interest rate to the housing market following the last macro-prudential step taken, which led to a decrease in the weight of the variable rate component in a mortgage, and despite the interest rate reduction, an additional macro-prudential measure is not required at this time.
Published by Globes [online], Israel business news - www.globes-online.com - on July 9, 2012
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