Monday, November 28, 2016

Israel maintains rate and to keep policy accommodative

    Israel's central bank left its benchmark interest rate at 0.10 percent, as expected, and confirmed that it will keep its monetary policy "accommodative for a considerable time," in light of inflation, the global economy, the exchange rate and the monetary policy of major central banks.
    The Bank of Israel (BOI), which has maintained the rate since its last cut in February 2015, also reiterated that the risks of achieving its inflation target "remain high."
    Israel's remains in the grip of deflation, with consumer prices falling by 0.3 percent in October, the smallest decline since February, and well below the BOI's target of 1-3 percent.
    But the BOI said the inflation rate has been rising for several months as the effect of lower energy prices and other price reductions abates, and medium and long-term expectations moved up this month following the U.S. Presidential election while short-term expectations were steady.
   Third-year forward inflation expectations rose to 1.36 percent from 1.0 percent last month while 3-5 year forward expectations rose to 1.45 percent from 1.2 percent. Longer-term expectations (5-10 years) rose to 2.37 percent from 2.25 percent.
    The central bank added that economic activity remains "positive," noting that first estimates of third quarter Gross Domestic Product show an annual increase of 3.2 percent, driven by investment and private consumption while exports declined.
    The exchange rate of the shekel "continues to weigh on the growth of exports and of the tradable sector," the BOI said, adding that it appreciated by 1.6 percent in terms of the nominal effective exchange rate from the previous policy discussion through Nov. 25.
   The shekel, which fell sharply from August 2014 to March 2015, has risen slightly this year and was trading at 3.86 to the U.S. dollar today, up 0.8 percent this year.

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

    "The decision to keep the interest rate for December 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 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 CPI for October increased by 0.2 percent. While inflation as measured by the change in the CPI over the past 12 months remains negative, an increase in the annual inflation rate has been apparent for several months, as the effects of the decline in energy prices and of initiated price reductions abate. Short-term inflation expectations remained stable this month, below the lower bound of the target range. Medium-term and long-term expectations increased this month, mostly after the results of the US election became known, and were affected by the increase in inflation expectations worldwide.
·     The picture of real economic activity remains positive. Based on the first estimate of third quarter National Accounts data, GDP increased by 3.2 percent, driven by investment and private consumption, while goods exports declined. The positive data, including revisions to previous figures, are consistent with the picture conveyed for some time by the labor market, of a continued increase in wages and employment.
·     To date, global financial markets’ responses to the US election results have been seen mostly in increased government bond yields and in the strengthening of the dollar worldwide. There is considerable uncertainty regarding the changes that will occur in US economic policy in the medium term and their effect on Israel’s economy. The global economy continues to grow at a slow pace, with a decline in the growth rate of world trade. Political developments in some advanced economies could weigh further on the growth of trade. Central banks continue their very accommodative monetary policy. Market assessments are that the probability of a 0.25 percentage point increase in the US federal funds rate in December is very high, and there was an increase in the interest rate path, though the pace of increases is still expected to be slow.
·     From the monetary policy discussion on October 26, 2016, through November 25, 2016, the shekel weakened by 0.8 percent against the dollar, and appreciated by 1.6 percent in terms of the nominal effective exchange rate. The shekel has appreciated by 3.0 percent over the past 12 months in terms of the nominal effective exchange rate. The level of the effective exchange rate continues to weigh on the growth of exports and of the tradable sector.
·     While home prices continue to rise, the stock of unsold new homes remains high, and some slowdown is apparent in monthly mortgage volume, with a continued increase in mortgage interest rates.
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 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 December 2016 will be published on December 12, 2016. 
The decision regarding the interest rate for January 2017 will be published at 16:00 on Monday, December 26, 2016."


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