Monday, August 24, 2015

Israel holds rate, warns of rising risks to inflation target

    Israel's central bank left its benchmark interest rate steady at 0.10 percent, as widely expected, but said "the risks to attaining the inflation target, and to growth, have increased," triggering a sharp rise in the shekel.
    The Bank of Israel (BOI), which cut its rate by 15 basis points in February to counter the negative impact on exports and inflation from a rise in the shekel, added that it "will use the tools available to it and will examine the need to use various tools to achieve its objectives of price stability."
    Israel's consumer prices continued to fall in July by an annual 0.3 percent, slightly less than the 0.4 percent in June but inflation has now been negative for the last 11 months.
    The BOI said short-term inflation expectations had declined sharply this month due to the fall in energy and commodity prices and the scheduled reduction in electricity prices, and average expectations for the next 12 months fell to 0.7 percent from 1.0 percent,  below the central bank target range of 1 - 3 percent.
    The Telbor curve, the rate on interbank loans, indicates some probability of a rate cut in the next few months, the BOI said, but added that most private forecasts don't expect a rate cut and forecasters' projection of the benchmark rate in one year remains 0.29 percent, on average.
     Israel's economy slowed sharply in the second quarter with the BOI attributing this to a moderation in world trade, noting that exports of goods and services contracted by 11.6 percent, partly due to labor disruptions in the chemicals industry.
    It added that annual growth in Gross Domestic Product was only 0.3 percent in the second quarter, well below the normal range of growth of 2.5 to 3.0 percent seen in the past two years.
    In addition to rate cuts, the BOI is reported to have been intervening in foreign exchange markets to weaken the shekel which has been firming against the U.S. dollar since mid-March.
    Today the shekel rose to 3.83 against the dollar after the BOI's policy decision from 3.88, to be largely unchanged since the start of the year.
    The BOI noted that since its previous policy decision on July 26, the shekel had weakened by about 1.3 percent against the dollar and by about 4.2 percent against the euro.

    The Bank of Israel issued the following statement that included its main considerations behind its policy decision:

"The main considerations behind the decision 
The decision to keep the interest rate for September 2015 unchanged at 0.1 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, and the exchange rate of the shekel, as well as on monetary policies of major central banks. 
The following are the main considerations underlying the decision:
·     The rate of increase in the CPI in recent months has been consistent with the inflation target. However, short-term inflation expectations declined sharply this month, against the background of decreases in energy and commodity prices in the past two months and the scheduled reduction in electricity prices; expectations are below the lower bound of the target range. Medium-term and long-term (forward) expectations remained entrenched near the midpoint of the inflation target range. 
·     Indicators of real economic activity are volatile but point to some decline in the growth environment, relative to the 2.5–3.0 percent growth range of the past two years, with a decline in exports against the background of decreased world trade, and continued growth of current consumption. Labor market data indicates that the unemployment rate is low, and the job vacancy rate is relatively high, with employment growth primarily in the services industries. 
·     Some slowdown is apparent in the global growth rate with an increase in the level of risk. Slowing growth in China is negatively impacting economic activity in numerous countries. In recent days there have been sharp declines in global financial markets, and the expected path of the US federal funds rate, as derived from capital markets, is lower than it was last month. 
·     From the monetary policy discussion on July 26, 2015, through August 21, 2015, the shekel weakened by 1.3 percent in terms of the nominal effective exchange rate, but it has appreciated by 5.8 percent for the year to date. Even with the depreciation this month, the development of the exchange rate since the beginning of the year weighs on the growth of exports and of the tradable sector, and is delaying the return of the inflation rate to within the target range.
·     Robust activity in the housing market continued this month as well, and was reflected in an especially elevated level of new home sales, and in an acceleration in the rate of increase of home prices, which have increased by 4.4 percent in the past 12 months. Likewise, the pace of new mortgages taken out remains high.
The Monetary Committee is of the opinion that the risks to attaining the inflation target, and to growth, have increased. 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.
The minutes of the monetary discussions prior to the interest rate decision for September 2015 will be published on September 7, 2015. 
The decision regarding the interest rate for October 2015 will be published at 16:00 on Thursday, September 24, 2015."


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