Analysts and economists monitoring the Bank of Israel's announcements of interest rate decisions have noted a small change in the regular wording of the announcement's closing paragraph: "The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high." This is the first time in a year that the sentence does not contain the word 'growth'. Market sources told "Globes" that this is first step to a change in the Bank of Israel's policy, from its current 'dovish' policy to 'neutral' and, in the future, possibly even to a 'hawkish' policy.
These sources estimate that the Bank of Israel could raise rates as early as the first quarter of 2017, if the world economy does not suffer any further upheavals. The rise in interest rates expected in the US is clearly a key factor, alongside Israeli market data indicative of a high level of growth, full employment and continuing wage rises of almost 3%.
At this stage, it is of course early to talk about an interest rate rise - the sources believe that dovish policy will be maintained as long as interest rate announcements continue referring to inflation risks and the sentence 'The monetary policy of major central banks is expected to remain very accommodative' continues to appear.
The most obvious explanation for the omission of 'growth' from the announcement is the strong growth data for the second quarter of 2016. According to initial estimates published by the Center Bureau of Statistics on August 16, the market grew 3.7% in the second quarter and 2.9% in the first half of 2016. Considering these data, which are very close to the market's growth potential, it is evident why the Bank of Israel had no particular worries regarding growth.
Nevertheless, other than quarterly data, we can assume the removal of growth from Bank of Israel considerations will have implications on its long-term monetary policy. The interest rate was changed for the last time in March 2015, when the Monetary Committee decided to cut it to a historical low of 0.1%.
Market expectations regarding further decreases and non-conventional quantitative expansion measures, such as bond acquisitions have gradually dissipated and the Bank of Israel's announcements stopped attracting any particular interest. Last June, Governor of the Bank of Israel Dr. Karnit Flug hinted that the policy might be changed when she said that chances that significant quantitative expansion tools will be employed are low, due to expectations that the US Federal Reserve Bank will raise interest rates.
However, these encouraging signs have not been realized and the bank has maintained a 'dovish' policy. The most recent forecast, published by the Bank of Israel Research Department two months ago (at the end of the second quarter), predicted that a 0.1% interest rate will be maintained until the third quarter of 2017, and then start increasing.
The financial market scrupulously monitors announcements made by the US Federal Reserve for any semantic changes, among other things using programs and algorithms. However, the wording of announcements issued by the Bank of Israel has excited only little interest, excluding key sentences indicative of the bank's considerations in interest rate decisions. The most noteworthy such elements are inflation and growth risks - specifically inflation rates not being sufficiently high while the annual price rise rate is lower than 1%, the minimum threshold defined for the bank in the Bank of Israel Law.
The third key indicator in the bank's announcement appears elsewhere in the text: "The Monetary Committee continues to assess that in view of the inflation environment, and of developments in growth in Israel and in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time." To date, this sentence has remained unchanged.
The Bank of Israel commented, "The Monetary Committee examines all economic data it is presented with on a monthly basis, and the interest rate announcement reflects the entirety of these data. The data that the committee received this month regarding real activity were better than the data last month, and the committee has seen no need to point out any growth risks at this stage. This month, the committee stated that it estimates that due to the inflation environment, and of developments in growth in Israel and in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time."
Published by Globes [online], Israel business news - www.globes-online.com - on August 31, 2016
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