The Bank of Israel Monetary Committee, headed by Governor Dr. Karnit Flug, has kept the interest rate for December unchanged at 0.1%. The interest rate has been unchanged since it was cut to a historic low of 0.1% in March 2015.
In citing the reasons for keeping the interest rate unchanged the Bank of Israel stressed rising inflation in Israel and an expected interest rate increase in the US, "The CPI for October increased by 0.2%. 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.
On Israel's economic performance, the Bank of Israel said, "The picture of real economic activity remains positive. Based on the first estimate of third quarter National Accounts data, GDP increased by 3.2%, 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.
Turning to international economic developments, the Bank of Israel observed, "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% 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.
On the shekel, the Bank of Israel continued, " From the monetary policy discussion on October 26, 2016, through November 25, 2016, the shekel weakened by 0.8% against the dollar, and appreciated by 1.6% in terms of the nominal effective exchange rate. The shekel has appreciated by 3% 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.
Finally, on home prices the Bank of Israel concluded, "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."
Published by Globes [online], Israel business news - www.globes-online.com - on November 28, 2016
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