The Bank of Israel today kept the interest rate for August unchanged at 2.25%, as expected. The Bank of Israel's Monetary Committee has decided to "sit on the fence" and wait for international developments and to see how the domestic fiscal picture develops after the decision to raise the budget deficit and possible tax hikes.
The Bank of Israel said that following last month's interest rate cut and the recent weakness of the shekel, which are expected to assist the Israeli economy to deal with the difficulties it faces, the Monetary Committee voted to leave the interest rate unchanged this month. This despite a growing amount of economic data indicating the risk of recession and a significant worsening of the European debt crisis in recent days.
The decision was no surprise with a "Bloomberg" poll earlier this week finding that 25 out of 27 analysts expected the August interest rate to remain unchanged.
The Bank of Israel noted that inflation over the the past 12 months was 1%, and that 12-month inflation expectations are near the midpoint of the 1-3% inflation target. However, it expects that the rise in commodity and energy prices will effect the inflation rate in the near term and draw it near to the center of the target range. It also notes that although the housing component of the Consumer Price Index (CPI) (rent) has slowed, and even halted, over the previous 12 months, the Central Bureau of Statistics home prices survey indicates that prices rose in March-May, although it is premature to determine if there has been a change in trend.
The Bank of Israel expressed its concern about Israel's growth rate, saying, "This month there was an increase in the level of uncertainty regarding the staying power of the growth rate of real activity in the recent period. Indicators which became available this month continue to support the assessment that the rate of growth in the first half of the year stabilized at slightly below 3%. In contrast, June export figures, which registered a sharp decline encompassing most industries, raise the concern that the economy is in an additional process of moderation in the rate of growth. Uncertainty regarding developments in the economy is affected by, among other things, the uncertainty in fiscal policy."
Equally worrying was the additional deterioration in the European economy this month, along with further signs of a slowdown in the global economy's growth rate. IMF revised downward its global growth forecasts, including the growth in both advanced and emerging economy countries, and of trade volumes. "The level of economic risks from the world following developments in Europe remained high, and with it the concern of negative effects on the domestic economy."
Published by Globes [online], Israel business news - www.globes-online.com - on July 23, 2012
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