This morning, the Bank of Israel published the minutes of September's Monetary Committee meeting at which the interest rate for October was decided. The committee's decision to keep the central bank's interest rate unchanged at 0.25% was unanimous.
The committee took note of the fact that inflation over the preceding months was zero, and that inflation expectations for the year ahead were at the lower end of the government's price stability target range of 1-3%, and had been falling steadily since the CPI reading for April this year was released.
Turning to activity in the Israeli economy, the committee members agreed that the growth rate had slowed in the past two quarters. The slowdown in the second quarter was mainly due to shrinking exports and a standstill in investment, which the committee members attributed to, among other things, continued weakness in world trade. As for the third quarter, the committee members concluded on the basis of several indicators that growth continued to moderate, which they largely attributed to the IDF's operation in the Gaza Strip, Operation Protective Edge.
Surveying developments in shekel exchange rates, the committee members expressed the view that a continuation of the depreciation of the shekel seen in the past two months would support exports and improve the competitiveness of local products, thereby supporting economic growth.
The committee noted that housing prices continued to rise and that the rate of new mortgage lending continued to be high, although the number of transactions had declined, partly because of uncertainty over the Ministry of Finance plan for 0% VAT for first-time homebuyers. Committee members expressed concern at the fact that building starts had declined since the beginning of the year. They discussed the risks arising from the housing market in a low interest rate environment, and gave the assessment that the measures instituted by the Supervisor of Banks, the latest of which was to raise the capital cushion that banks would need to allocate to housing loans, were helping to reduce the risks to the finance system from mortgages and to strengthen the banks' capacity to absorb losses should the risks materialize.
The committee members discussed the expected expansion of the fiscal deficit, on the basis of current discussions on the budget, in 2015. They expressed the view that moderate fiscal expansion could strengthen economic activity, if it focused on encouraging growth and local demand. The committee expressed the fear that a sharp rise in public spending, without a rise in taxes and the cancellation of tax exemptions, would mean a substantial rise in the fiscal deficit and in government debt. They pointed out that the steady fall in the ratio of government debt to GDP had bolstered the credibility and stability of the Israeli economy, and said that a reversal of this trend would be liable to have negative consequences in this respect.
Published by Globes [online], Israel business news - www.globes-online.com - on October 6, 2014
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