The Bank of Israel (BOI), which cut its rate by 75 basis points in 2014, said recent data continued to point to an acceleration in economic activity in the fourth quarter following the slowdown in connection with the military offensive in Gaza in July.
The BOI estimated in December that operation "Protective Edge" detracted about 0.3 percent from economic output. Israel's Gross Domestic Product expanded by 0.06 percent in the third quarter from the second quarter but the Central Bureau of Statistics revised its 2014 growth forecast up to 2.6 percent from 2.2 percent while the BOI has forecast growth of 2.5 percent and 3.2 percent in 2015.
A survey of companies in the fourth quarter showed an improvement in most industries, with a 1.5 percent rise in the export from low technology industries that are affected to a greater extent by the depreciation of the shekel currency, and there has been a step up in the rate of growth in the composite index and labour market data are positive.
Last week the shekel rose against the euro but has weakened against the U.S. dollar. Since August, when the BOI cut its rate to the current level, the cumulative depreciation has been 5.5 percent. Today the shekel was quoted at 3.99 to the dollar and just under 4.5 to the euro.
Israel's consumer prices were unchanged in December, the BOI said, below an expected increase of 0.1 percent, and for the year the inflation rate was negative 0.2 percent, well below the BOI's target of 1 - 3 percent inflation.
A reduction in water prices in January along with lower electricity rates in February are expected to reduce the inflation rate by about 0.4 percent in a one-off effect but private forecasters' projections for the next 12 months remain at 0.6 percent on average.
Rate curves in the short-term Telbor interest rate market and the Makam Treasury bill declined further in January, indicating a low probability that the BOI will reduce its rate in coming months while forecasters do not indicate any rate cut, the BOI said.
The Bank of Israel issued the following statement with its main considerations behind its decision:
"The decision to keep the interest rate for February 2015 unchanged at 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:
v The CPI was unchanged in December. Inflation expectations for short terms are below the lower bound of the target range, among other things against the background of continued declines in energy prices around the world and the expected effect of the reductions in water and electricity prices.
v Indicators that became available this month continue to point to an acceleration of activity in the fourth quarter, after a slowdown in the third quarter resulting from Operation Protective Edge. Fourth quarter Companies Survey data indicate improvement in most industries, with a notable upturn in low technology industries, which are affected more by the exchange rate. In recent months there has been a step up in the rate of growth of the Composite State of the Economy Index. Labor market data continued to indicate a positive picture.
v Against the background of exceptional developments in global foreign exchange markets, the shekel strengthened by 6.5 percent vis-à-vis the euro and weakened against the dollar by 1.3 percent this month. After a depreciation of 10.4 percent from August in the effective exchange rate, there has been an effective appreciation of 4.4 percent since December, so that the cumulative depreciation since August has been 5.5 percent.
v In Europe, a large-scale quantitative easing program was announced, and interest rates were reduced in several countries. This month, the IMF reduced its projections for global growth and world trade volume development; the forecast for US growth was revised upward. Prices of energy and other commodities continued to decline this month, which is expected to support the recovery of growth in major economies and to work toward continued declines in inflation.
v The number of new home purchases, particularly of homes in the price range that would have been included in the zero-VAT plan, has increased sharply since September, and from August through November there has been a moderate decline in the number of new homes available for sale. The rate of new mortgages taken out continues to be very high.
v Net withdrawals from corporate bond funds continued, though at a more moderate rate, and market spreads are stable.
The Monetary Committee is of the opinion that the current level of the interest rate supports the continuation of the recovery in economic activity, and the return of inflation to within the target range.
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 and will examine the need to use various tools 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.
The minutes of the monetary discussions prior to the interest rate decision for February 2015 will be published on February 9, 2015.
The decision regarding the interest rate for March 2015 will be published at 16:00 on Monday, February 23, 2015."
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