Monday, December 26, 2016

Israel maintains rate, risk to inflation target remains high

    Israel's central bank left its benchmark interest rate at 0.10 percent, as widely expected, and reiterated its guidance that it will retain an accommodative monetary policy stance "for a considerable time" in light of the global economy, the exchange rate of the shekel and the monetary policy of major central banks.
    The Bank of Israel (BOI), which has maintained the rate since cutting it in February 2015, also repeated that it still considers the risk to achieving its inflation target of 1-3 percent as high.
    Israel's consumer price inflation rate was minus 0.3 percent in November, less-than-expected by the BOI and the same as in October, despite the dissipating impact of the fall in energy prices and price reductions.
   Short-term inflation expectations also remain below the BOI's target while longer-term expectations are anchored around the midpoint. 
    The BOI's staff expect inflation to be at the lower bound of the target range - or 1 percent - over the next four quarters and then return to within the range in the fourth quarter of next year.
    The central bank's interest rate is forecast to remain steady before rising to 0.25 percent in the fourth quarter of 2017 and then to 0.5 percent in the second half of 2018.
     In its statement, the BOI also noted that the shekel had strengthened in the last month and is up by 5.6 percent over the past year in terms of the nominal effective exchange rate, which it said "continues to weigh on the growth of exports and of the tradable sector."
    After falling sharply in the second half of 2014, the shekel has been trending firmer in the last two years and was trading at 3.82 to the U.S. dollar today, up 1.8 percent this year.
    Israel's economy has been expanding in recent quarters and the central bank said based on surveys the business sector is seen growing at a similar pace in the fourth quarter as in previous quarters.
    In an update to its forecast, BOI staff revised upward their 2016 growth forecast to 3.5 percent from a previous forecast of 2.8 due to an upward revision of first half data.
    For 2017 Israel's Gross Domestic Product is seen growing 3.2 percent, up from a previous forecast of 3.1 percent, and by 3.1 percent in 2018 as the economy slowly transitions to growth based more on exports than on domestic demand.
    In the third quarter of this year, GDP grew by an annual rate of 3.8 percent in the third quarter of this year, up from 3.6 percent in the second quarter.

    The Bank of Israel released following statement with its main considerations for its decision:

"The decision to keep the interest rate for January 2017 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 November declined by 0.4 percent, a greater decline than had been expected, and below the seasonal path consistent with achieving the inflation target. Inflation as measured by the change in the CPI over the past 12 months remains negative, despite the direct effects of initiated price reductions and of the decline in energy prices dissipating. Short-term inflation expectations are below the target, while longer term expectations derived from the capital market remained anchored near the midpoint of the target range. The Research Department assesses that the inflation rate will be at the lower bound of the target range within about a year.
·     The picture of real economic activity remains positive. Based on preliminary data from the Companies Survey, it may be assessed that in the fourth quarter as well, business sector product grew at a pace similar to that of previous quarters. Labor market data continue to indicate a high level of employment, a low level of unemployment, and a continued increase in wages. The Research Department assesses that GDP increased by 3.5 percent in 2016, and that in the coming years it will continue to grow by an annual rate of around 3 percent or slightly higher.
·     The global economy continues to grow at a slow pace, with a decline in the rate of expansion of world trade. Political developments in some advanced economies are likely to weigh further on trade growth. In the US, there was an acceleration in activity in the second half of the year, while in Europe growth is moderate and the risks to its persistence are relatively large. The US federal funds rate was increased and the expected future interest rate path rose as well; in contrast, the ECB extended the horizon of its quantitative easing. 
·     From the monetary policy discussion on November 27, 2016, through December 23, 2016, the shekel strengthened by 1.3 percent against the dollar, and appreciated by 2.0 percent in terms of the nominal effective exchange rate. The shekel has appreciated by 5.6 percent over the past 12 months in terms of the nominal effective exchange rate, against the background of appreciation of 6.3 percent vis-à-vis the euro. The level of the effective exchange rate continues to weigh on the growth of exports and of the tradable sector.
·     Home prices continue to rise at a high rate, even though the stock of unsold new homes is high, and in the past year there have been more than 50,000 building starts. The slowdown in monthly mortgage volume continues, 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 January 2017 will be published on January 9, 2017. 
The decision regarding the interest rate for February 2017 will be published at 16:00 on Monday, January 23, 2017"



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