Monday, November 23, 2015

Israel holds rate, repeats on hold for considerable time

    Israel's central bank left its benchmark interest rate unchanged at 0.10 percent, as expected, and confirmed its recent guidance that "monetary policy will remain accommodative for a considerable time" in view of the inflationary environment, economic growth, the exchange rate of the shekel and the monetary policies of major central banks.
    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, first issued the guidance of keeping its policy accommodative for considerable time in its October statement.
    The BOI's monetary committee also repeated that the risks to achieving its inflation target of 1- 3 percent and to growth "remain high" and it will examine the need to use "various tools" to reach its objective and will continue to keep a close eye on asset markets, including the housing market.
    Israel's consumer price inflation rate fell by minus 0.7 percent in October from minus 0.5 percent in September though the BOI added that the monthly change amounted to plus 0.1 percent compared with expectations for a decline of 0.1 percent.
    Excluding energy and the administrative reduction in water and electricity rates, consumer prices rose by an annual rate of 0.9 percent in October, with the reduction in Value Added Tax and lower fuel prices expected to contribute to a drop in consumer price index in November, BOI said.
    Expectations for inflation over the next year remain low, the BOI said, and private forecasters expect the BOI to keep the policy rate at the current level in the next few months and then to raise it in about a year.
    Over the last month the shekel has traded in a relatively narrow range and was trading at 3.88 to the U.S. dollar today, up 0.5 percent since the start of the year.
     The impact on Israel's economy from recent violence "is moderate," the BOI said, with first estimates of Gross Domestic Product in the third quarter showing a return to the rate of growth seen in the past two years.
     Growth was helped by an acceleration in public consumption and a recovery in exports, but the BOI cautioned that recent data indicate that the improvement in exports may have been transitory while the picture presented by the labor market continues to be positive.
    Israel's GDP expanded by 0.62 percent in the third quarter from the second quarter for annual growth of 2.52 percent, up from 2.13 percent in the first quarter.

    The Bank of Israel issued the following statement that included the main considerations underlying its decision:"

"The following are the main considerations underlying the decision:

·        The inflation environment in the short term is affected by factors of a one-off nature. Short-term inflation expectations remained low this month, and are affected by these factors and by the recent renewed decline in commodity prices. Medium-term (forward) expectations declined slightly after increasing in the previous month, and long-term (forward) expectations remained entrenched near the midpoint of the target range.
·        The first estimate of third quarter growth data indicates a return to the rate of growth that prevailed in the past two years, without compensation for the near-zero growth in the second quarter. The rate of growth in nondurable goods consumption was maintained, there was an acceleration in public consumption, and after a prolonged period of time there was a recovery in exports. However, the most recent data indicate that the improvement in exports may have been transitory. The picture presented by labor market data continues to be positive. To date, the effect of the wave of violence on economic activity is moderate. 
·        This month, the OECD again reduced its global growth forecast, against the background of the weakness in world trade and the slowdown in developing economies. Global financial market expectations are that the US Federal Reserve will begin to increase the federal funds rate soon, but that in Europe and other major economies, monetary accommodation will be enhanced.
·        From the monetary policy discussion on October 25, 2015, through November 20, 2015, the shekel strengthened by about 1.6 percent in terms of the nominal effective exchange rate, as the shekel was stable against the dollar and appreciated relatively sharply against the euro. Since the beginning of the year there has been an effective appreciation of 7.5 percent. The development of the exchange rate since the beginning of year is weighing on growth of exports and the tradable sector, and is delaying the return of inflation to within the target range.
·        The volume of new mortgages taken out remains elevated, as do new home sales and the stock of homes available for sale. Home prices have increased by 6.6 percent over the past 12 months. However, prices have been stable over the past two months. 

The Monetary Committee is of the opinion that the risks to achieving the inflation target and to growth remain high. 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 December 2015 will be published on December 7, 2015. 

The decision regarding the interest rate for January 2016 will be published at 16:00 on Monday, December 28, 2015."


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