Monday, June 23, 2014

Israel holds rate, revises down inflation, growth forecasts

    Israel's central bank (BOI) maintained its benchmark interest rate at 0.75 percent, as expected, and revised downward its forecasts for the policy rate, inflation and economic growth through 2015.
    The Bank of Israel (BOI), which surprised financial markets by cutting its rate in February by 25 basis points, said inflation in May had been slightly lower than expected while the latest data point to continued moderate economic growth, similar to that of the second half of 2013.
    In its latest forecast, the BOI's staff forecast average 2014 inflation of 0.4 percent, down from its March forecast of 0.9 percent, and 2015 inflation of 1.8 percent, down from 2.0 percent. Inflation in 2013 was 1.8 percent.
    Israel's inflation rate was steady at 1.0 percent in May and April, at the lower end of the central bank's target range of 1.0 to 3.0 percent, despite a marked increase in the housing component, eduction, culture and entertainment that was countered by a drop in clothing and footwear prices.
    Based on financial market prices and economists' expectations, the BOI said there is still a probability of one interest rate reduction in the next three months though there was still a slight decline in that probability compared with last month.
    The central bank's staff's forecast for the BOI's policy rate was unchanged at 0.75 percent this year but cut to 1.50 percent in 2015 from the March forecast of 2.0 percent.
    Israel's economy, which expanded by 3.3 percent in 2013, is forecast to expand by 2.9 percent this year, down from the March forecast of 3.1 percent, and by 3.0 percent in 2015, the same as was forecast in March.
    "The picture of real activity seen in the data and indicators which became available this month points to the economy continuing to grow at a moderate rate, similar to that of the second half of 2013," the BOI said.
    Israel's Gross Domestic Product expanded by 0.68 percent in the first quarter of this year from the previous quarter for annual growth of 3.07 percent, up from a rate of 2.93 percent.
    But the BOI said there was a virtual standstill in goods exports in May, with a slight improvement in high tech exports and a deterioration in low tech exports, adding "this standstill is in line with that of world trade."
    Israel's shekel currency strengthened by 1.3 percent against the U.S. dollar in the last month, with the effective exchange rate up by about 1.2 percent, the BOI said. The shekel was quoted at 3.44 to the dollar today, up from 3.47 at the end of last year and just over 4 to the dollar in mid-2012 when the shekel started to trend upwards.
   A 7.5 percent rise in the shekel in 2013 was a major reason behind rate cuts of 100 basis points and Israeli manufacturers frequently call on the central bank to weaken its exchange rate to 3.8 to the dollar.
    Earlier this month members of the parliament's finance committee demanded that the BOI set and defend an unspecified rate for the shekel, similar to the policy by the Swiss National Bank and the Czech National Bank.



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