Monday, July 25, 2016

Israel maintains rate, risks to inflation, growth still high

    Israel's central bank left its key policy rate at 0.10 percent, as expected, saying the "risks to achieving the inflation target and to growth remain high," building on last month's statement when it said that the risks to growth and inflation had increased due to the uncertainty created by Britain's decision to leave the European Union (EU).
    The Bank of Israel (BOI), which cut its rate by 15 basis points in 2015, also repeated that it "will use the tools available to it and will examine the need to use various tools" to reach its inflation objective of 1-3 percent, encourage growth and employment, and a stable financial system.
    Israel's inflation rate was steady at minus 0.8 percent in June from May, as forecast, but excluding energy and lower administered prices, the inflation rate was 0.6 percent.
    "The inflation environment continues to increase moderately," the BOI said, noting that short-term expectations remain stable but remain below the lower bound of the target range.
    Israel's shekel has firmed this month and on July 4 dealers reportedly said that the BOI had bought U.S. dollars as the shekel firmed.
    "The level of the effective exchange rate continues to weigh on the growth of exports and of the tradable sector," the BOI said.
    The shekel was trading at 3.84 to the dollar today, up 1.3 percent since the start of the year. In terms of the effective exchange rate, the BOI said the shekel was up 1.7 percent from June 26 through July 22, a rate of appreciation that is similar to that of the past 12 months.

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

"The decision to keep the interest rate for August 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 range of 1–3 percent a year, and to support growth while maintaining financial stability. The Monetary Committee continues to assess that in view of the inflation environment, and of developments 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:
·     The inflation environment continues to increase moderately. The Consumer Price Index increased in the past three months, and short-term inflation expectations remained stable this month after increasing in previous months, but they are still below the lower bound of the inflation target range. Medium and long-term expectations remain anchored within the target range.
·     Indicators of activity are in line with the assessment that the economy continues to grow at the rate that characterized recent years, led by private consumption and by industries focused on domestic activity. The slowdown in manufacturing is concentrated at high-technology industries, and a trend of increase in services exports is becoming apparent. The picture conveyed by labor market data continues to be positive, and there are signs that the economy is nearing full employment.
·     In the weeks since the referendum in the UK, most financial markets stabilized. However, the uncertainty regarding the ramifications of the Brexit process is expected to remain high, and due to the Brexit decision, the IMF reduced its global growth forecast. In Europe, weakness is becoming apparent and risks to the economy are increasing, while in the US, indicators of activity, primarily labor market data, were strong. The monetary policy of major central banks is expected to remain very accommodative.
·     From the monetary policy discussion on June 26, 2016, through July 22, 2016, the shekel strengthened by 1.2 percent against the dollar. In terms of the effective exchange rate, the shekel appreciated by 1.7 percent, similar to the rate of appreciation over the past 12 months. The level of the effective exchange rate continues to weigh on the growth of exports and of the tradable sector.
·     The rate of increase in home prices remains elevated, and both the level of transactions and the volume of mortgages remain high. The stock of homes for sale continues to increase.
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 August 2016 will be published on August 8, 2016. 
The decision regarding the interest rate for September 2016 will be published at 16:00 on Monday, August 29, 2016."


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