The Bank of Israel Monetary Committee headed by Governor Dr. Karnit Flug has lowered the interest rate for August by 0.25% to 0.5% due to the continued slowdown and the ongoing appreciation of the shekel. The interest rate is at its lowest point since August 2009.
The Bank also decided to narrow the interest rate corridor in the credit window and the commercial bank deposit window from 0.5% to 0.25%.
The Bank of Israel said that the rate cut is consistent with its monetary policy which is intended to return the inflation rate to within the price stability target of 13% a year over the next 12 months, and to support growth while maintaining financial stability. The bank added that path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel.
In citing its main considerations underlying the decision, the Bank of Israel only referred in passing to the current security situation. It said, "Indicators of real economic activity which became available this month indicate continued moderate growth, similar to previous quarters. With that, they refer to the period before the deterioration of the security situation; its moderating effect cannot yet be estimated. Weakness continues in goods exports, against the background of the virtual standstill in world trade and the cumulative appreciation, with moderation in high technology exports. Weakness is also apparent in private consumption over recent months. Labor force survey data indicate stability, and the growth in the number of employee posts has halted."
On inflation the Bank of Israel said, "There was a decline in the inflation environment this month. Inflation measured over the preceding 12 months declined, as expected, to a level of 0.5%, below the lower bound of the target range. The CPI excluding the housing component declined by 0.2% over that period. Since the April CPI was published, there has been a decline in inflation expectations for all terms, and short-term expectations approached the lower bound of the target range."
The Bank of Israel also observed that the shekel strengthened 0.8% in July and 2% so far in 2014.
On home prices the bank said, "Home prices continued to increase in AprilMay, and the rate of new mortgages taken out remained elevated, while the risk characteristics of those mortgages continued to decline due to steps taken by the Supervisor of Banks. The number of housing transactions declined sharply."
Finally the Bank of Israel noted that, "Corporate bond spreads continued to widen, but they are still at a low level. This month, there were net withdrawals from corporate bond mutual funds."
Published by Globes [online], Israel business news - www.globes-online.com - on July 28, 2014
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