The Bank of Israel Monetary Committee headed by Governor Dr. Karnit Flug, has lowered the March interest rate by 0.15% from from 0.25% to just 0.1%. The interest rate was already at an all-time historic low. The move was unexpected, with most analysts expecting the rate to remain unchanged.
In citing its main considerations for the decision, the Bank of Israel stressed the strength of the shekel and deflation.
The Bank of Israel observed that the shekel is strengthening, "This month, the shekel continued its appreciation, strengthening by 2.6% against the dollar, and by 3.3% in terms of the nominal effective exchange rate. After a depreciation of 10.4% between August and December in the effective exchange rate, there has been an appreciation of 7.6% since December, so that the cumulative depreciation since August has only been 2%. Continued appreciation is liable to weigh on growth in the tradable industries - exports and import substitutes." On deflation the Bank of Israel said, "The Consumer Price Index (CPI) declined by 0.9% in January, against the background of a decline in energy prices, a scheduled reduction in water prices, and a relatively sharp decline in the housing component. The rate of inflation as measured over the past 12 months was negative 0.5%, as the decline in energy prices had a direct effect of reducing the CPI by 0.7%. The one-off reduction in electricity prices is expected to contribute -0.3% to the CPI for February. After the January CPI was published, short term inflation expectations from all sources remained below the target range, and there was a slight decline in longer term expectations toward the midpoint of the target range."
The Bank of Israel then spoke of rising employment and strong growth, "In the fourth quarter the increase in the employment and labor force participation rates continued, as did the decline in the unemployment rate and the increase in the number of job vacancies. The high rate of growth in the fourth quarter came against the background of the recovery from the effects of Operation Protective Edge, and primarily reflected growth in public consumption, and growth in exports that continued in January as well in view of the cumulative depreciation since August. Tax revenues continued to increase in January, at a rate similar to that of recent months."
On the housing market the Bank of Israel said, "In the fourth quarter, there was an increase of 22% in housing market transactions, consisting of purchases by young couples and by buyers upgrading their homes, while the number of transactions involving investors remains stable. The moderate decline in the number of new homes for sale continues, and the rate of mortgages being taken out remains high. Corporate bond market spreads increased slightly this month, but they remain low."
Published by Globes [online], Israel business news - www.globes-online.com - on February 23, 2015
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