The Bank of Israel Monetary Committee, headed by Governor Dr. Karnit Flug, has left the interest rate for November unchanged at 0.25%. Analysts had expected the Bank of Israel to cut the rate, which is already at an historic low, by 0.10-0.15%. This is the second month running that the bank has left the rate unchanged after cutting the rate for August and September.
The Bank of Israel hinted that it would use other means to stimulate economic growth such as a quantitative easing plan and said, "The Monetary Committee is of the opinion that the effects of the recent interest rate reductions, which brought the interest rate to a level of 0.25% have not yet been fully reflected in activity and in inflation, and in light of that decided to keep the interest rate unchanged this month."
In stating the main reasons behind its decision, the Bank of Israel said, "The inflation environment continued to decline this month. The inflation rate measured over the preceding 12 months was negative 0.3%. Inflation expectations for the coming year, from various sources, declined to below the lower bound of the inflation target range, and two-year expectations are at the lower bound. Expectations for longer terms declined as well, though they are near to the midpoint of the target range."
The Bank of Israel added, "Most indicators that became available this month signal that activity in the third quarter slowed, and perhaps even declined. Most of the slowdown in activity derives from Operation Protective Edge. The Companies Survey points to a decline in activity in the third quarter in all industries, primarily in tourism. There was no substantial decline in confidence indices despite Operation Protective Edge, and there was improvement in the Purchasing Managers Index."
On the weakening shekel the Bank of Israel said, "In light of the reductions in the Bank of Israel interest rate, and the strengthening of the dollar worldwide, the shekel weakened by 2.8% this month in terms of the nominal effective exchange rate, and it has weakened by about 4.1% since the beginning of the year. Continued depreciation will support a recovery in exports and in the tradable sector as a whole, and is expected to contribute to returning the inflation rate to within the target range."
On global developments the Bank of Israel said, "Concern increased this month of a further moderation in the global economy, against the background of the increased uncertainty and volatility in various markets. Disappointing data were received this month in the eurozone, with an emphasis on its larger economies. In the US, the recovery in growth continues, though there are downside risks to the forecast. Based on market assessments, the timing of when the Fed will begin to raise the federal funds rate has been deferred to around October 2015."
On the Israeli housing market the Bank of Israel continued, "The sharp decline in the number of transactions in the housing market continues, and there is a moderation in the rate of mortgages being taken out. Home prices declined by 1% in July-August, and their rate of increase over the 12 months ending in August slowed to 5%. It is difficult to assess the response that will occur when the uncertainty regarding the zero-VAT law is removed."
Published by Globes [online], Israel business news - www.globes-online.com - on October 27, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014