Monday, July 28, 2014

Israel cuts rate 25 bps on low inflation, high FX rate, Gaza

    Israel's central bank cut its benchmark interest rate by 25 basis points to 0.50 percent due to inflation falling below its target, further strength in the shekel's exchange rate and to counter an expected hit to economic activity from nearly three weeks of fighting in Gaza.
    The Bank of Israel (BOI) has now cut its rate twice this year by a total of 50 basis points and repeated its guidance that the "path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel."
    Israel's inflation rate fell to 0.5 percent in June, below the lower bound of the BOI's target of 1.0 to 3.0 percent, and inflation expectations have also fallen, including expectations for the next 12 months based on banks'  internal rates that have fallen to 1.0 percent, the central bank said.
    The central bank still doesn't have any data on how Israel's economy is reacting to the conflict in Gaza, but the BOI said similar events in the past had a moderate impact on the economy with Gross Domestic Product contracting by about 0.5 percent.
    The recovery from previous events was generally rapid, but the impact on the tourism industry is likely to last longer, the central bank said.

    Data prior to the conflict indicated continued moderate economic growth that is similar ago previous quarters, with continued weakness in goods exports against a background of a virtual standstill in world trade and the cumulative appreciation, with a moderation in high technology exports and weak private consumption in recent months.
    In the first quarter of this year, Israel's GDP expanded by 0.72 percent from the previous quarter for annual growth of 3.13 percent, up from 2.93 percent in the previous quarter.
    Israel's shekel strengthened by 0.5 percent against the U.S. dollar since the BOI's previous meeting in June for an appreciation of 2.0 percent so far this year, the BOI said. The shekel was trading at 3.43 to the dollar today, slightly down from last week's close of 3.42.


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