The Bank of Israel (BOI), which has maintained its rate this year after lowering it by 15 basis points in 2015, also said that the exchange rate of the shekel had risen further since the last discussion of monetary policy on July 24 and reiterated its view that at this level the shekel "continues to weigh on the growth of exports and of the tradable sector."
After falling sharply in the second half of 2014 until March 2015, the shekel has been steadily firming and was trading at 3.79 to the U.S. dollar today, up 2.6 percent this year. In terms of the effective exchange rate, the shekel is up 5.1 percent over the past 12 months, the BOI said.
The BOI also said that consumer price inflation had risen more than expected in July but short-term inflation expectations were still below the bank's lower bound of its target range while medium and long-term expectations remain within its target range of 1-3 percent.
Israel's inflation rose slightly to minus 0.6 percent from minus 0.8 percent in June, with prices of tradable goods in the index down by 3.2 percent year-on-year while prices of non tradable goods up by 0.8 percent, the BOI said.
Israel's economic growth in the first half of the year was also higher than expected, but the central bank said it was still too early to gauge whether the growth rate, which was higher than the average seen in recent years, will be sustained.
Israel's Gross Domestic Product grew by 2.9 percent in the first half of the year with second quarter growth estimate at 3.7 percent, the BOI said, as private consumption continues to drive growth, supported by an increase in wages and the central bank's accommodative policy.
Private consumption rose by 9.5 percent and by 7.1 percent excluding personal vehicles and investment rose by 11.1 percent, including vehicles. Exports rose by 5.7 percent following several quarters of near-zero growth, the BOI said.
The Bank of Israel published the following statement with the main considerations behind its decision:
"The decision to keep the interest rate for September 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.
Following are the main considerations underlying the decision:
· The Consumer Price Index for July increased more than expected, following three successive positive CPI rates of change. Short-term inflation expectations remained low this month, and are still below the lower bound of the inflation target range. Medium and long-term expectations remain anchored within the target range.
· In the first half of 2016, the economy grew by 2.9 percent, similar to the average growth rate of recent years. In the second quarter, based on the first estimate of National Accounts data, growth was higher than expected, at 3.7 percent. However, it is too early to establish if this rate, which is higher than the recent years’ average, will be sustained. Private consumption continues to drive growth, supported by the increase in wages and by accommodative monetary policy. Exports increased at an adequate rate, although it still lags world trade growth. The picture conveyed by labor market data remains positive, and there are signs that the economy is nearing full employment.
· The global economy continues to grow at a moderate rate. Second quarter growth data for major economies were low, and weakness continues in world trade. Monetary policy is very accommodative in Europe, Japan, and the UK, and additional central banks reduced interest rates this month. In the US, there was an increase in the probability that the federal funds rate will be raised this year, though the uncertainly surrounding it is still high.
· From the monetary policy discussion on July 24, 2016, through August 26, 2016, the shekel strengthened by 2.2 percent against the dollar. In terms of the effective exchange rate, the shekel appreciated by 1.1 percent, and has appreciated by 5.1 percent 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.
· Although the most recent observation indicated a decline in prices, the rate of increase in home prices remains elevated, and the levels of transactions and mortgage volumes remain high. The stock of homes for sale continues to be high.
The Monetary Committee is of the opinion that the risks to achieving the inflation target 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 September 2016 will be published on September 12, 2016.
The decision regarding the interest rate for October 2016 will be published at 16:00 on Monday, September 26, 2016."