Monday, November 24, 2014

Israel maintains rate, recent cuts not yet fully reflected

Israel's central bank maintained its benchmark interest rate at 0.25 percent and confirmed its guidance from October that the impact of recent rate reductions "have not yet been fully reflected in activity and inflation, and in light of that decided to keep the interest rate unchanged this month as well." 
The Bank of Israel (BOI), which has cut its rate by 75 basis points this year, also repeated its standard phrase that the future rate path depends on inflation, economic growth, the monetary policy of major central banks and the shekel's exchange rate. 
The BOI did not make any reference to the possible use of unconventional monetary policies. 
In the minutes from its October 27 meeting, the BOI said it was assessing the use of additional tools if necessary because the "interest rate too is close to full use." 
Israel's economy has been hit hard by its army's offensive into Gaza in July, known as Operation Protective Edge, with the Gross Domestic Product contracting by 0.9 percent in the third quarter from the second quarter due to a sharp decline in investment and continued drop in exports while private consumption continued to increase, the BOI said. 
But recent economic data - relating to good exports, industrial production, trade, services and indirect tax revenue - point to a recovery in activity "to the moderate growth level of just before the conflict," the BOI added. 
Israel's currency, the shekel, has been weakening since early August and fell by another 1.1 percent against the U.S. dollar this month.  Since the start of August, it has weakened by 7.1 percent and some 3.9 percent since the start of the year. 
Today it was trading around 3.86 to the dollar, down from 3.47 at the beginning of the year. 
"Continued depreciation will support a recovery in exports and in the traceable sector as a whole, and is expected to contribute to returning the inflation rate to within the target range," the BOI said. 
Israel's headline inflation rate was unchanged at minus 0.3 percent in October from September.  The BOI targets inflation of 1-3 percent and the bank said the drop in short-term and medium-term inflation expectations continued, apparently incorporating the expected one-off effect of a reduction in electricity and water prices in January. 

The Bank of Israel issued the following statement:

The main considerations behind the decision

The decision to keep the interest rate for December 2014 unchanged at 0.25 percent is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability.  The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel. 

The following are the main considerations underlying the decision:

The CPI for October increased by 0.3 percent, led by an increase of 0.7 percent in prices of tradable goods.  The rate of inflation as measured over the previous 12 months remained at negative 0.3 percent.  This month, the decline continued in short-term and medium-term inflation expectations, which apparently incorporate the expected one-off effect of a reduction in electricity and water prices in January. 

The first estimate of National Accounts data for the third quarter indicates negative growth in GDP, as a result of Operation Protective Edge.  This primarily reflects a sharp decline in investment and a continued decline in exports, while private consumption continued to increase.  Indicators which became available after Operation Protective Edge, relating to goods exports, industrial production, trade and services revenues, and indirect tax revenues point to a recovery in activity, to the moderate growth level of just before the conflict. 

The shekel weakened by 1.1 percent against the dollar this month, and appreciated by 0.2 percent in terms of the nominal effective exchange rate.  Since the beginning of August, when a trend of depreciation in the effective exchange rate began, the shekel has weakened by 7.1 percent, and it has depreciated by about 3.9 percent 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. 

Recent months’ trends continued in the global economy this month—growth in the US, and continued weakness in Europe, Japan and most emerging markets.  In the US, a quantitative easing program concluded, in Japan the program was expanded, and in Europe, the operations are expected to be expanded soon.  The decline in oil prices is expected to contribute to a decline in global inflation, but will support economic recovery. 

The decline in the number of housing market transactions continues, with an increase in sales of new homes in recent months, and a moderation in the rate of mortgages being taken out.  Home prices declined by 0.1 percent in August-September, and their rate of increase over the 12 months ending in August slowed to 4.7 percent.  Uncertainty continues regarding policy measures in the housing market and their ramifications. 

In recent months, there have been net new investments by the public in general bond mutual funds and withdrawals from corporate bond funds.  Corporate bond market spreads remain low. 

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 percent, 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 as well. 

The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets.  The Bank will use the tools available to it and will examine the need to use various tools to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market."