The Bank of Israel has kept the interest rate for April and May unchanged at 1.75%, in line with expectations.
In explaining its decision the bank expressed cautious optimism, " Updated indicators of economic activity in February point toward continuation of the signs of improvement which began to be seen in January, but it is still too early to determine if this is a positive turning point. According to the Research Department's staff forecast, GDP growth is expected to be 3.8% in 2013, and 4% in 2014. Excluding the effects of natural gas production from "Tamar" drilling, GDP growth is expected to be 2.8% in 2013 and 3.3% in 2014.
On inflation the Bank of Israel said, "The inflation environment reflected in increased actual prices and expectations for one year ahead remains stable. Inflation over the previous 12 months was 1.5%, and forecasters' inflation projections for the next year are 1.8%, on average."
"One of the sources of uncertainty regarding developments in the economy is the government's fiscal policy. An examination of the budget commitments which are already in place indicates that in order to abide by the expenditure rule, the government must reduce commitments this year by about NIS 13 billion (about 1.3% of GDP). Even after such a reduction, the budget would reflect a real expansion of 4.5% compared with the 2012 budget. Deviation in the government deficit is liable to lead to increased interest rates in the economy.
On international developments, the Bank of Israel said, "The global macroeconomic picture is mixed. There are signs of recovery in the US economy, while in Europe, the slowdown continues. With that, it appears that there has been a decline in the probability of a crisis occurring, a development which has reduced the high level of uncertainty that prevailed in the past year."
The Bank of Israel also observes that the shekel continues to strengthen, "In terms of the nominal effective exchange rate, the shekel continued its appreciation this month, following its strengthening in recent months."
The Bank of Israel also notes that home prices are on the rise, "The rate of increase in home prices continues to rise, and in the 12 months which ended in January, home prices increased by 8.6%, compared with an increase of 6.7% in the 12 months which ended in December."
Finally the Bank of Israel said, "During the past month, the expansionary policies of major central banks continued, and interest rates in those economies remained near zero. The accommodative policies of central banks in major advanced economies, based on their announcements, are expected to continue during the rest of the year."
Published by Globes [online], Israel business news - www.globes-online.com - on March 24, 2013
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