Bank of Israel leaves April interest rate unchanged

Karnit Flug

The Bank of Israel cited price reductions, the strengthening shekel and home price rises in its decision to keep the rate at 0.1%.

The Bank of Israel Monetary Committee, headed by Governor Karnit Flug, has kept the interest rate for April unchanged at 0.1%, as expected. In December, Bank of Israel Governor Dr. Karnit Flug said that the rate was unlikely to rise in the near future. 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 rate unchanged, the Bank of Israel said, "The inflation environment remained low this month as well, against the background of price reductions initiated by the government and low energy prices. However, the increase in oil prices and the beginning of the exhaustion of the effect of administrative price reductions led to a relatively sharp increase in inflation expectations from all sources and for all ranges. Based on the Research Department’s staff forecast, assuming that there are no sharp changes in oil prices and no additional price reductions, the annual inflation rate is expected to enter the target range toward the middle of 2017. The increase of wages in the economy is expected to support this process.

The Bank of Israel added, "The picture of real economic activity, in which the economy is continuing to grow by the same moderate rate that characterized it in recent years, did not change this month: the acceleration of growth in the fourth quarter apparently did not continue in the first quarter. This is indicated by preliminary data from the Companies Survey and from the latest data on goods exports, which showed them to be low. In contrast, the picture conveyed by labor market data remains positivea sharp increase in health tax receipts together with other data indicates a high level of employment and a prolonged increase in wages, and the job vacancy rate increased again."

On global developments the Bank of Israel said, "The trend of moderation in global economic activity continued this month, in particular in developing economies and in Japan. The ECB and several other central banks enhanced their monetary accommodation this month, and FOMC members moderated their projected path of federal funds rate increases. Stock market indices increased, with a decline in risk indices."

Turning its attention to the shekel, the Bank of Israel said, "The nominal effective exchange rate remained relatively stable this month. From the monetary policy discussion on February 21, 2016, through March 23, 2016, the shekel strengthened by about 1.8% against the US dollar and by 0.5% in terms of the nominal effective exchange rate. Over the past 12 months there has been an appreciation of 6% in terms of the nominal effective exchange rate, and its level continues to weigh on growth of exports and the tradable sector."

Finally on home prices, the Bank of Israel said, "The increase in home prices continues, and they rose by 7.8% over the past 12 months. The volume of new mortgages taken out remains high, despite the increase in mortgage interest rates in recent months. The elevated level of activity in the construction industry is expected to continue contributing to an increase in supply."

Published by Globes [online], Israel business news - www.globes-online.com - on March 28, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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