The Bank of Israel (BOI), which cut its rate by 15 basis points in 2015, also repeated its view from December that the risks to reaching its inflation target of 1-3 percent "have increased, and the risks to growth remain high."
Israel's inflation rate fell to minus 1.0 percent in December from 0.9 percent in November and the central bank said short- and medium-term inflation expectations had declined in the month due to the continued fall in oil and commodity prices.
Private forecasters now see an rise of 0.3 percent in consumer price inflation in the next 12 months, down from 0.5 percent in the previous month.
In December the BOI forecast inflation of 0.6 percent in 2016 and 1.6 percent in 2017.
However, the BOI also said that private forecasters had not changed their view that the BOI would retain its interest rate for the next few months and only raise it slightly in about a year. The bank's staff forecasts that the rate will remain at 0.1 percent in the first nine months of this year and then rise to 0.25 percent by the fourth quarter before rising to 1.0 percent by end-2017.
In December the BOI lowered its growth forecast for 2015 to 2.4 percent from 3.0 percent forecast in September and cut the 2016 forecast to 2.8 percent from 3.3 percent.
In the third quarter Israel's Gross Domestic Product expanded by 2.52 percent year-on-year and the BOI said partial indicators pointed to economic activity continuing its moderate improvement in the fourth quarter with the impact of the security on economic activity remaining moderate.
After falling sharply against the U.S. dollar in 2014, the shekel was stable against it in 2015 though it appreciated just over 10 percent against the euro.
So far this year it has weakened against the U.S dollar and was down 1.8 percent since the start of the year, quoted at 3.96 today.
But over the last 12 months, the shekel has risen 6.6 percent measure in terms of its nominal effective exchange rate, the BOI said.
The Bank of Israel issued the following statement with its main considerations behind its decision:
· "Against the background of increasing volatility in financial markets and energy prices, the short-term inflation environment continued to decline this month, and there were declines in medium-term (forward) expectations as well. Long-term (forward) expectations remain entrenched above the midpoint of the target range. Further price reductions initiated by the government (in public transportation, water, and automobile insurance) are expected to be reflected in the CPI for January and February.
· Partial indicators that became available this month point to economic activity continuing its moderate improvement in the fourth quarter of 2015, and the effect of the security situation on economic activity remaining moderate. The Companies Survey indicates a slight improvement vis-à-vis the third quarter. The job vacancy rate continues to increase, and together with an increase in wages reflect a positive picture in the labor market.
· In the past month, global financial markets declined amid high volatility. The picture of activity remains positive in Europe, the picture is mixed in the US, and weakness continues in emerging markets. The IMF and the World Bank reduced their 2016 and 2017 forecasts for global growth and world trade. The ECB expressed readiness to further enhance the monetary accommodation, and market expectations are that the rate of increase in the federal funds rate will be lower than that expected last month.
· From the monetary policy discussion on December 27, 2015, through January 22, 2016, the shekel weakened by about 2 percent against the US dollar and by about 0.4 percent in terms of the nominal effective exchange rate. Over the past 12 months there has been an appreciation of 6.6 percent in terms of the nominal effective exchange rate, and its level continues to weigh on growth of exports and the tradable sector.
· In recent months, the increase in home prices accelerated, and they rose by 7.6 percent over the past 12 months. The volume of new mortgages taken out remains high. The elevated level of activity in the construction industry is expected to continue to contribute to increasing supply.
The Monetary Committee is of the opinion that the risks to achieving the inflation target have increased, and the risks 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."