The Bank of Israel Monetary Committee has kept the interest rate for June unchanged at 0.75%. Analysts had been divided over whether the interest rate would remain unchanged or be cut by 0.25% due to the slowdown in growth. However, the Bank of Israel Monetary Committee, headed by Governor Dr. Karnit Flug, resisted a rate cut because it is uncertain about the extent of the slowdown.
The Bank of Israel said that the main considerations behind its decision were:
"The Consumer Price Index" increased by only 0.1% in April, markedly lower than expectations, and the rate of inflation over the previous 12 months was 1%, the lower bound of the target range. This measure of the inflation rate is expected to decline in the coming months, to below the lower bound of the target range, though expectations for 1-year ahead are within the target range."
"Indicators of real economic activity which became available this month point to more moderate growth than assessed in the previous month, though the extent of the moderation is uncertain. The first estimate of first quarter data signals a slowdown in growth, due to a contraction of private consumption and fixed capital formation, while labor market data continue to indicate growth in employment and reduced unemployment, and there was improvement in indices of consumer confidence and of expectations of activity. Signs of moderation are also seen in Composite State of the Economy Index data, including goods exports."
"In the past month, the shekel weakened by 0.4% in terms of the nominal effective exchange rate, while since the beginning of 2014 the effective exchange rate has been stable, and it has appreciated by 4.4% over the past year."
"Against the background of disappointing first quarter growth data in the US and in Europe, the OECD reduced its 2014 global growth and world trade projections this month. Emerging market weakness continues to weigh on global growth. The probability of further monetary easing in Europe increased, and expectations remain that in the US, the federal funds rate will begin to be increased in the second half of 2015."
Finally on the housing market the Bank of Israel said, "Home prices continued to increase in February-March, and their annual rate of increase remains around 6.7%. The rate of mortgages taken out remains elevated, with continued decline in the risk characteristics of new mortgages. The increase in the number of building completions continues, but some slowdown is apparent in the number of building starts. This month, as well, there is continued uncertainty regarding the effect on housing market price levels and activity volume of the policy measures that the government decided upon."
Published by Globes [online], Israel business news - www.globes-online.com - on May 26, 2014
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