The Bank of Israel (BOI), which has cut its rate by a total of 75 basis points this year, repeated its guidance that "he path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel. "
The BOI issued the following statement with the main considerations behind its decision:
The main considerations behind the decision
The decision to reduce the interest rate for September 2014 by 0.25 percentage points, to 0.25 percent, is consistent with the Bank of Israel's monetary policy which is intended to return the inflation rate to within the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability. The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel.
The following are the main considerations underlying the decision:
- There was an additional decline in the inflation environment this month. Inflation measured over the preceding 12 months declined to 0.3 percent, and the decline in inflation expectations for all terms continued. Forecasters’ projections for the coming year, and 1-year expectations derived from the capital market, are very near the lower bound of the target range, and expectations derived from banks’ internal interest rates declined below the range.
- Based on the first estimate of second quarter National Accounts data, there was a further slowdown in economic growth, particularly in goods exports, even before the deterioration in the security situation. There was some increase in the growth rate of business sector product compared to previous quarters. Labor market data indicate a halt to the improvement in employment. Data which have become available so far do not yet allow the assessment of the loss of GDP that will derive from the fighting, which still continues, but it occurs against the background of a slowdown in growth of the economy, and an environment of low economic growth worldwide. In particular, an extended negative impact is expected in tourism, and a negative impact, apparently temporary, in private consumption.
- The shekel weakened by 1.7 percent this month in terms of the nominal effective exchange rate. Continued depreciation will support a recovery in exports and in the tradable sector. The shekel has appreciated by about 0.4 percent since the beginning of the year.
- The global picture continues to indicate limited recovery, with renewed growth in the US and moderation in Europe and Japan. Major central banks are expected to continue accommodative monetary policy for an extended period of time.
- Home prices increased by 7.7 percent in the previous 12 months, and the rate of new mortgages taken out remains elevated. The uncertainty regarding the application of a zero VAT rate on new homes continues to have an impact on housing market activity.
The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets. The Bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market.
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