BoI: Shekel strength is excessive

The Monetary Committee was unanimous in its decision to lower the August interest rate.

All six Bank of Israel Monetary Committee members supported the latest interest-rate reduction, to 0.5%, according to the protocols from the Bank of Israel interest-rate discussion, released today. A close look at the meeting protocols reveals that the Monetary Committee is concerned about another drop in inflation, due to the slowdown in the economy and the decline in local demand, and that they believe that the shekel’s strengthening against the dollar is excessive.

“The level of the exchange rate reflects some over-appreciation,” the report stated. “Committee members expressed concern over further appreciation, especially in light of the slow growth in world trade volumes.”

The Bank of Israel believes that cutting interest rates to a low not seen since the summer of 2009 is a “necessary step in light of the decline in the inflation environment, the slowdown in GDP growth, and with it the uncertainty regarding the moderating effect of Operation Protective Edge on growth, the cumulative appreciation of the shekel, and the concern over continued slowdown in the global economy.”

The Gaza operation came up in the monetary discussions, and though it was not possible to estimate the impact Operation Protective Edge would have on the economy at the time of the interest-rate decision, the Bank of Israel does not believe the damage will be significant.

“It may be assessed that [Operation Protective Edge’s] effects [will] be seen in tourism for several quarters, while its effect on trade and services will apparently be for a short term,” the report said. “As can be learned from similar events in the past, the effect on the economy’s rate of growth will apparently be moderate.”

The Bank of Israel attributes greater importance to encouraging economic growth than to inflation, which is at the bottom of the government target (1%-3%). “Committee members agreed that the moderation that occurred over recent months in the rate of price increases was affected by, among other things, a decline in food and energy prices and by the continued appreciation. Some Committee members were of the opinion that this moderation also derived from weakness in domestic demand, and expressed concern that it would lead to a further decline in inflation expectations. Other members, however, were of the opinion that the temporary moderation of inflation is not expected to have an impact on activity, and that taking into account the level of prices in Israel’s economy it is even a positive development. At the conclusion of the discussion on inflation, Committee members agreed that action should be taken in order to return the inflation rate to within the price stability range within the coming 12 months,” said the report.

The main reason for the slow growth in the economy, according to the Monetary Committee, is the slowdown in global growth, and the negative effect of the decrease in global trading and Israeli exports. According to the Bank of Israel, “As long as world trade does not recover, it will be difficult for the economy to increase the growth rate.”

Published by Globes [online], Israel business news - www.globes-online.com - on August 11, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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