Monday, May 23, 2016

Israel holds rate, sees higher risks to growth, exports fall

    Israel's central bank left its key policy rate steady at 0.10 percent, as expected, and said its policy stance will remain "accommodative for a considerable time," a guidance that has been reinforced by "the intensifying decline in exports in recent months," along with developments in global economic growth and inflation, domestic economic activity, the exchange rate and the monetary policy of major central banks.
    But the Bank of Israel (BOI) has clearly become more concerned over economic growth, noting the "worrying contraction in exports" and an increased risk to growth. Last month the BOI merely said the risks to growth "remain high."
    In April Israel's exports declined by an annual 11 percent to US$3.596 billion, the lowest since August 2009, while exports excluding diamonds and startup contracted by 12.9 percent. In addition, services exports have not grown in 1-1/2 years, the BOI said.
    Israel's Gross Domestic Product grew by an annual 1.7 percent in the first quarter of this year, down from 2.1 percent in the fourth quarter of last year, with private consumption continuing to lead growth with an increase of 4 percent.
    Israel remains mired in deflation, with consumer prices down by an annual 0.9 percent in April compared with March's fall of 0.7 percent and the BOI repeated its view from last month that risks to achieving its inflation target "remain high."
    The BOI repeated its recent phrase that it will "examine the need to use various tools to achieve its objectives of price stability," employment, growth and a stable financial system.
    Interest rate markets have remained unchanged, the BOI said, adding they don't show any change in BOI rates in the next year and private forecasters project that the policy rate will remain at its current level in coming months.
    In March the BOI, which has maintained its key rate since cutting it by 15 basis points in February last year,  said it expected inflation to turn around in the next few months and said it saw no need to follow other central banks and pursue various forms of extraordinary policy measures.
    The BOI's March forecast saw inflation averaging 0.2 percent by the fourth quarter of this year, then 0.8 percent by the first quarter of 2017 and 1.4 percent by end-2017, finally moving into the central bank's inflation target of 1-3 percent by the middle of 2017.
    Economic growth was forecast to expand 2.8 percent this year, up from 2015's 2.5 percent, and then by 3.0 percent in 2017.
    After depreciating sharply between August 2014 and March 2015, Israel's shekel has firmed but since the last BOI policy meeting on April 20, the shekel has weekend by 3 percent against the U.S. dollar. Over the preceding 12 moths, the shekel is up by 3.3 percent in terms of the nominal effective exchange rate.
   The shekel was quoted at 3.87 to the dollar today, largely unchanged since the start of the year.

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

"The decision to keep the interest rate for June 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. The intensifying decline in exports in recent months reinforces 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:
·     The inflation environment remains low, with diverse developments this month: the CPI for April increased, but by a lower rate than expected; expectations for various terms moved in different directions, though medium-term and long-term expectations continue to be anchored within the target range. 
·     The first estimate of National Accounts data indicates a worrying contraction in exports, after a prolonged virtual standstill, while private consumption, supported by the low interest rate and wage increases in the economy, continues to drive growth. In contrast, the picture conveyed by labor market data continues to be positive, and is reflected in a low level of unemployment, a high level of employment, wage increases, and a high job vacancy rate.
·     In global economic activity, weakness remains focused on emerging markets, and in the first quarter on the US and UK as well. The slowdown in the growth of world trade continues. The recovery in Europe remains fragile. Major central banks continued monetary accommodation, but did not enhance it, and the markets’ expected timing of an increase in the US federal funds rate was brought forward, after having been deferred in previous months.
·     From the monetary policy discussion on March 27, 2016, through April 19, 2016, the shekel weakened by 3 percent against the US dollar and by 1.6 percent in terms of the nominal effective exchange rate. Over the past 12 months there has been an appreciation of 3.3 percent in terms of the nominal effective exchange rate, and the exchange rate level continues to weigh on growth of exports and the tradable sector.
·     The rate of increase in home prices moderated slightly in recent months but remains high. The volume of new mortgages taken out also remains elevated, despite an increase in mortgage interest rates in recent months.
The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high, and that the risks 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 June 2016 will be published on June 6, 2016. 
The decision regarding the interest rate for July 2016 will be published at 16:00 on Monday, June 27, 2016."


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