The Bank of Israel (BOI), which cut its rate by 15 basis points in February to counter the negative impact on exports and inflation from a rise in the shekel, also repeated its guidance from last month that it "will examine the need to use various tools to achieve its objectives of price stability," a sign that it may still resort to unconventional policy tools if considered necessary.
Israel's inflation rate was steady at minus 0.4 percent in June and May, with the BOI saying the rate of increase during the March to June period was consistent with achieving its inflation target of 1.0 to 3.0 percent.
However, measured over the last 12 months, the BOI added that inflation is expected to remain negative "for several more months" and the fall in energy prices that resumed in the last month along with the rise in the shekel was likely to postpone the return of inflation to the target range.
The BOI said short-term inflation expectations from various sources remained around the lower bound of its target range in the last month while private forecasters projections for the next 12 months are for an increase of 1 percent on average. Twelve-month inflation expectations from markets are currently 1.0 percent and expectations for 2 years are 1.3 percent.
However, most private forecasters do not expect a reduction in the BOI's rate, projecting it to be 0.29 percent in one year.
The shekel started falling against the U.S. dollar in August 2014 and continued until mid-March, hitting just over 4 to the dollar. It then strengthened through mid-June to 3.7 before then firming again slightly. Today it was quoted at 3.78 to the dollar for an appreciation of 3.0 percent this year.
The Bank of Israel issued the following statement with its main considerations behind its decision:
"The main considerations behind the decision
The decision to keep the interest rate for August 2015 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 over the next twelve months, and to support growth while maintaining financial stability. The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, and the exchange rate of the shekel, as well as on monetary policies of major central banks.
The following are the main considerations underlying the decision:
· The rate of increase in the CPI over the preceding four months has been consistent with the inflation target. Short-term inflation expectations from various sources are around the lower bound of the target range. Expectations for medium and longer terms remain entrenched near the midpoint of the target range. However, the decline in energy prices, which resumed in the past month, and the appreciation of the shekel, may defer the return of the inflation rate to within the target range.
· Indicators of real economic activity that became available this month point to the economy continuing to grow at its moderate rate of recent years, led by private consumption and with a decline in exports. The second quarter Companies Survey supports this assessment. The Composite State of the Economy Index increased by 0.4 percent in June, and was positively affected by an increase in imports and in the job vacancy rate, but declines in goods exports and in industrial production were notably negative components. Labor market data continue to indicate a high level of employment and activity.
· Developments in China’s economy and the debt crisis in Greece, despite their recent stabilization, continue to pose risks to a global economic recovery. Moderate recovery continues in the US and Europe. While in the US the probability increased of an interest rate rise beginning this year, in Europe the monetary expansion continues, and in several economies the interest rate was reduced.
· The shekel strengthened by 2.5 percent in terms of the nominal effective exchange rate this month, and has appreciated by 7.1 percent for the year to date, primarily as a result of the weakening of the euro. The appreciation, and the moderation in growth of world trade, weigh on the growth of exports and of the tradable sector.
· Robust activity in the housing market, both on the supply side and on the demand side, continued this month, and was reflected in a record level of new mortgage volume, and an especially elevated level of new home sales. In the past 12 months, home prices have increased by 3.2 percent.
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 2015 will be published on August 10, 2015.
The decision regarding the interest rate for September 2015 will be published at 16:00 on Monday, August 24, 2015."
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