The Bank of Israel's (BOI) guidance of keeping its monetary policy stance "accommodative for a considerable time" is the same as in recent months but the central bank added today that that risks to achieving its inflation target and to economic growth have risen.
Last month the BOI, which has kept its key rate unchanged since cutting it by 15 basis points in February last year, said risks to achieving its inflation target "remains high" while risks to growth have increased.
Noting the sharp reaction of global financial markets to last week's vote by Britain to pull out of the European Union (EU), the BOI said it was still too early to asses whether the short-term effects on financial markets had run its course as uncertainty is expected to continue in coming months while the monetary policy of major central banks is expected to remain "very accommodative."
Israel's inflation rate rose slightly to minus 0.8 percent in May from minus 0.9 percent in April and the BOI said there was a slight increase in one-year inflation expectations while the rapid rise in wages and continued increase in private consumption will support the return of inflation to the bank's target range of 1-3 percent in a bout a year.
In an update to its quarterly forecast, BOI staff projected that inflation this year will average 0.0 percent, up from minus 0.9 percent in 2015, and then 1.2 percent in 2017.
In March BOI staff forecast inflation this year of 0.2 percent and 1.4 percent in 2017.
Economic growth is forecast to average 2.4 percent this year, below last year's 2.5 percent, and then rise to 2.9 percent in 2017, with private consumption up by 4.3 percent this year before easing to 2.8 percent next year.
In March the BOI forecast economic growth of 2.8 percent this year and 3.0 percent in 2017.
In the first three months of this year, Israel's Gross Domestic Product grew by an annual rate of 1.7 percent, down from 2.1 percent in the previous quarter. Although this level of growth is seen as low, the BOI said it still shows growth at a level that characterized in the past few years.
"The decline in exports is concentrated in a number of industries that were affected by factors, some of which are not expected to persist, and private consumption continues to lead growth, supported by the low interest rate and the increase in wages," the BOI said.
The Bank of Israel issued the following statement with the main considerations underlying its decision:
"The decision to keep the interest rate for July 2016 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, and to support growth while maintaining financial stability. Uncertainty regarding the implications of the Brexit, and the continued decline of exports in recent months, strengthen the Monetary Committee’s assessment that in view of developments in the inflation environment, in growth in Israel and in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time.
The following are the main considerations underlying the decision:
· In the past two months the Consumer Price Index increased, and there was a slight increase this month in one-year inflation expectations from various sources. The rapid increase in wages and continued increase in private consumption will support the return of inflation to within the target range within about a year, according to the Research Department’s staff forecast. Medium and long-term expectations remain anchored within the target range.
· The second estimate of National Accounts data for the first quarter also shows that growth was low, but the Research Department’s assessment shows that the economy has returned to the level of growth that characterized it the past few years. The decline in exports is concentrated in a number of industries that were affected by factors, some of which are not expected to persist, and private consumption continues to lead growth, supported by the low interest rate and the increase in wages. The picture emerging from the labor market remains positive, and there are signs that the economy is nearing full employment.
· The results of the referendum in Britain were a surprise, and the global financial markets reacted sharply. At this stage it is too early to assess whether the short-term effect on the financial markets has run its course. In the coming months, uncertainty is expected regarding the implications of the Brexit process for the global economy. The monetary policy of the major central banks is expected to remain very accommodative.
· From the monetary policy discussion on May 22, 2016, through June 24, 2016, the shekel weakened by 0.4 percent against the dollar, and the effective exchange rate remained virtually unchanged—appreciation of 0.1 percent. Looking at the past year, the effective exchange rate stabilized, but its level continues to pose difficulties for the growth of exports and of the tradable sector.
· The pace of home price increases remains high, and both the level of transactions and the volume of mortgages remain high.
The Monetary Committee is of the opinion that, in view of the uncertainty generated due to the Brexit, the risks to achieving 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 July 2016 will be published on July 11, 2016.
The decision regarding the interest rate for August 2016 will be published at 16:00 on Monday, July 25, 2016."
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