Bank of Israel officials believe that in the wake of the interest rate cut for February by 25 basis points to 4.25%, the policy of rate cuts is coming to an end. Most of the bank’s economists believe that, at this time, it would be better not to give any signal about interest rate decisions for the coming months, according to the minutes of the Monetary Council meeting for the February interest rate decision, published today.
Governor of the Bank of Israel Prof. Stanley Fischer, Deputy Governor Prof. Zvi Eckstein, foreign exchange activity department acting director Balfour Ozer, director of research Dr. Karnit Flug, director of the Monetary Department Dr. Edward Offenbacher, director of the Foreign Currency Department Barry Topf, Chief of Staff to the Governor Gaby Fiszman, and head of International Affairs and advisor to Governor Ohad Bar-Efrat participated in the Monetary Council meeting.
Most of the participants noted that an interest rate cut for February would result in a 1% gap with the US Fed rate, while most central banks are signalling a rise in short-term interest rates.
The economists said, however, that in view of very favorable economic conditions, in terms of the improvement in Israel’s risk premium on international markets, the current accounts surplus in the balance of payments, and the large amount of foreign investment, a cut of 25 basis points was possible.
The participants stressed the importance that the Bank of Israel attached to meeting the inflation target, and that an interest rate cut would increase the likelihood of a more rapid return to the inflation target.
The Bank of Israel reports that inflation in the fourth quarter of 2006 was an annualized minus 2%, and that low inflation was likely to persist during the first quarter of 2007. The bank noted that the Consumer Price Index (CPI) is expected to fall during the first quarter, and would only rise during the second quarter. In addition, inflation during most of 2007 will probably be below the 1% lower limit of the inflation target, in view of inflation in the past 12 months.
The Bank of Israel noted, however, that inflation, excluding housing and the effect of the shekel-dollar exchange rate, was 2%, the mid-point of the inflation target. The CPI in 2006 fell because of the housing and imported goods components, which fell because of the weak dollar.
In this context, the bank noted a further improvement in Israel’s risk premium on international markets, which fell to 2% from 2.3% in December 2006.
The Monetary Council was also optimistic about the economy, noting the Bank of Israel predicts 5% growth in 2007, and a further surplus in the current account after last year’s $7 billion surplus. Industrial exports, excluding diamonds, rose 14.4% in dollar terms in 2006 to over $30 billion. Imports, excluding diamonds, rose 10% in dollar terms to $31 billion.
Published by Globes [online], Israel business news - www.globes.co.il - on February 12, 2007
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