The Bank of Israel published the minutes of the Monetary Committee's deliberations on its interest rate decision for May today. The committee decided to leave the rate at 0.1%, and, as the minutes reveal, the decision was unanimous.
Committee members discussed at length the low inflation environment. They said that the inflation had been negative over the previous twelve months chiefly because of the direct and indirect effects of the fall in the price of oil, and because of one-time measures by the government: a VAT cut and cuts in controlled prices. In discussing inflation expectation, the committee focused on short- to medium-term expectations derived from the capital market, pointing out that short-term expectations (up to one year) remained similar to levels that had prevailed recently, after rising the previous month, and that medium- and long-term expectations were within the inflation target range.
On economic activity, the committee members agreed that the economy was continuing to grow at a rate similar to that of recent years. The fourth quarter of 2015 saw relatively high growth, apparently compensating for previous months, and the first quarter of 2016 showed signs of some moderation. Growth mainly reflected rising private consumption. Exports, on the other hand, continued to decline, and the companies survey indicated moderating activity in trade and services. The decline in exports was mainly in high tech, while traditional and mixed sectors remained stable.
Looking to the foreseeable future, the committee members estimated that in the absence of growth in exports because of the weakness in global trade, maintaining the rate of growth meant private consumption had to keep growing rapidly. Some members expressed the concern that private consumption could not lead the economy to higher growth rates in the long run. On the other hand, the committee noted that the labor market continued to demonstrate strength, manifest in a high level of employment and rising wages.
On the housing market, the committee expressed concern at the continuing rise in the price of homes and in the level of new mortgage taking. The committee discussed the prolonged rise in mortgage interest rates, and noted that in recent months the gap between these rates and interest rates on relevant government bonds had widened. The committee took the view that this gap was likely to reduce the attractiveness of investment in housing. The committee also noted that the stock of homes for sale remained high, and that the high level of construction activity would continue to contribute to greater supply. The committee members agreed that the risks in this market remained high.
In conclusion, the members of the committee agreed that the current rate of interest was appropriate to the low inflation environment and domestic economic activity, taking into consideration the prevailing global situation both in economic activity and in monetary policy developments in the major economies, and that it supported the return of the inflation rate to the target range. They took the view that given the estimates for global trend and the risks to growth in Israel, and given the time it would take for inflation to return to the target range, it could be assumed that monetary policy in Israel would remain expansionary for a some considerable time.
Published by Globes [online], Israel business news - www.globes-online.com - on May 5, 2016
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