The Bank of Israel has kept the interest rate for March unchanged at 1.75%. Analysts had been split on whether the Bank of Israel would keep the rate at 1.75% or lower it to 1.5%. The Bank of Israel kept the interest rate for February unchanged at 1.75%, after cutting it for January.
The Bank of Israel said that he decision to keep the interest rate for March at 1.75% is consistent with its policy, which is intended to entrench the inflation rate within the price stability target of 1-3% over the next twelve months, and to support growth while maintaining financial stability.
The Bank of Israel observed that, "indicators of real economic activity are mixed. Surveys indicate an improvement in expectations of economic activity in the business sector, and the most recent monthly indicators show a possibility that there was some improvement in January in the rate of activity. In contrast, Israel's GDP grew by 2.5% in the fourth quarter of 2012, a lower rate than in previous quarters. This was apparently affected by, among other things, Operation Pillar of Defense. It is therefore early to assess whether this represents a turnaround in economic activity."
On inflation, the Bank of Israel said, "The development of actual prices and of inflation expectations for the year ahead continues to indicate an inflation environment below the midpoint of the target range. Inflation over the previous 12 months was 1.5%, and inflation expectations for the year ahead, based on various sources, are slightly below the midpoint of the target range."
The Bank of Israel is more optimistic than previously on the global economy, "The widespread assessment is that the risk of deterioration in the global economic crisis has declined. At the same time, macro-economic data from leading economies are mixed. Therefore, at this stage, it is too early to determine whether this represents a positive turnaround."
The Bank of Israel also notes that the shekel has appreciated in recent months while home prices are still rising. "In the 12 months ending in December, home prices increased by 6.7%, compared with 5.8% in the 12 months to November. The growth in the high volume of new mortgages taken also continued in recent months. Last week, the Supervisor of Banks published a Draft Directive requiring banks to increase their capital buffers and allowances against the risks inherent in the housing loans portfolio. This is a prudential step, but one that may also moderate the pressure in the housing market to a certain extent."
The Bank of Israel has cut the interest rate to its current level from 3.25% in 2011.
Published by Globes [online], Israel business news - www.globes-online.com - on February 25, 2013
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