Bank of Israel keeps interest rate unchanged at 0.1% for October

By Marisa Wong

Morgantown, W.Va., Sept. 24 – The Bank of Israel said it will hold the interest rate steady at 0.1% for October. The bank last lowered the rate by 15 basis points for March 2015.

The bank’s monetary committee said its decision to keep the interest rate for October unchanged at 0.1% is consistent with its monetary policy, which is intended to return the inflation rate to within the target of 1% to 3% per year and to support growth while maintaining financial stability.

The committee said that the path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, and the exchange rate of the shekel, as well as on monetary policies of major central banks.

According to a press release on Thursday, one of the main considerations underlying the committee’s decision was that the rate of increase in the CPI in recent months has been consistent with achieving the inflation target.

However, in the coming months several one-off factors are expected to effectively reduce the CPI. With this, there was an additional decline in short-term inflation expectations this month. To date, there is no evidence that the decline in the inflation environment is a result of moderation in domestic demand. Medium and long-term (forward) expectations remain entrenched near the midpoint of the target range, the bank said.

The committee said that, also affecting its decision, indicators of real economic activity that became available this month support the assessment that the economy is growing at a moderate rate, and that the sharp decline in the growth rate in the second-quarter growth rate derived mainly from transitory factors.

Foreign trade data indicate some recovery in the third quarter, but over time the trend of lack of growth in exports, as well as in investment, is worrisome. The elevated employment level and low unemployment are consistent with the increase seen in wages.

In addition, there are increasing signs of a slowdown in the growth rate of the global economy, with an emphasis on China and other emerging economies. In the United States and Europe, moderate recovery continues. Global equity markets declined, with considerable volatility. Inflation in many countries continues to moderate, the bank commented.

From the monetary policy discussion on Aug. 23 through Sept. 21, the shekel weakened by about 1.1% in terms of the nominal effective exchange rate, the bank reported. However, since the beginning of the year there has been an effective appreciation of 4.8%. The development of the exchange rate since the beginning of the year is weighing on growth of exports and the tradable sector and is delaying the return of inflation to within the target range, the committee said.

Finally, the committee noted that robust activity in the housing market continued this month and was reflected in an especially elevated level of new home sales and in an acceleration of the rate of price increases, which have risen by 6% over the past 12 months.

The committee said it believes the risks to achieving the inflation target and to growth remain high. The bank will continue to monitor developments in the Israeli and global economies and in financial markets and will continue to keep a close watch on developments in the asset markets, including the housing market.

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