The guidance by the Bank of Israel (BOI) that it will maintain rates for some time is new and compares with its statement from September when it merely said that its future stance would depend on inflation, economic growth, the shekel and the policy of major central banks.
But the BOI, which cut its rate by 15 basis points in February to counter the negative impact on exports and inflation from a rise in the shekel's exchange rate, also repeated that it considers the risks of achieving its inflation target as "high and the risks to growth have increased."
The recent wave of violence in Israel may impact private consumption and tourism, the BOI said based on past experience, adding that as long as the violence does not go on for too long, its effect is "expected to be moderate."
Data for the third quarter of this year is consistent with continuing moderate growth with private consumption propelling growth while exports remain weak.
Israel's Gross Domestic Product expanded by only 0.3 percent in the second quarter from the first.
Israel's consumer price index fell by another 0.4 percent in September, slightly less than expected, but higher than the 0.5 percent fall seen in August, and substantially below the BOI's inflation target of 1 -3 percent.
Inflationary expectations, however, remained stable in October and in some cases showed a slight uptick, the BOI said, adding that private forecasters' projections for the next 12 months rose to 0.65 percent from 0.4 percent and medium-term expectations (3-5 years) rose to 1.8 percent from 1.4 percent.
The BOI added that the Telbor curve, the rate on interbank loans, indicated no change in BOI rates over the next year.
After dropping from August last year to March this year, the shekel has been firming and rose further following the BOI's decision. The shekel was quoted at 3.87 to the U.S. dollar today, up from 3.89 on Friday and up by 0.5 percent since the beginning of the year.
Compared with the BOI's previous policy decision on Sept. 21, the shekel was up 1.1 percent against the dollar and 2.5 percent against the euro, 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 November 2015 unchanged at 0.1 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, and to support growth while maintaining financial stability. In view of developments in the inflation environment, in growth in Israel and in the global economy, in the exchange rate, and in the monetary policy of the major central banks, the Monetary Committee’s assessment is that monetary policy will remain accommodative for a considerable time.
The following are the main considerations underlying the decision:
· The inflation environment in the short term is affected by factors of a one-time nature. Short-term inflation expectations remained low this month, and are affected by these factors and by the recent stabilization of commodities prices. Medium-term (forward) expectations increased, and long-term (forward) expectations remained anchored near the midpoint of the target range.
· Indicators of real economic activity that became available this month support the assessment that the economy is growing at a moderate rate, led by private consumption, with continued weakness in exports. Labor market data indicate continued improvement in the labor market. Past experience shows that the wave of violence may have an effect on private consumption and on tourism, but that if it does not last long, the effect is expected to be moderate.
· The International Monetary Fund lowered its global growth and global trade forecasts for 2016, mainly in view of developments in the emerging markets. The interest rate in a number of economies was lowered this month, and market assessments are that monetary policy in the major economies will remain accommodative, and that accommodation is even expected to increase in some of them.
· From the monetary policy discussion on September 21, 2015, through October 23, 2015, the shekel strengthened by about 1.1 percent in terms of the nominal effective exchange rate. Since the beginning of the year there has been an effective appreciation of 5.9 percent. The development of the exchange rate since the beginning of year is weighing on growth of exports and the tradable sector, and is delaying the return of inflation to within the target range.
· There was a decline in home prices this month, but over the past 12 months they have increased by 6.2 percent. There is a marked increase in the sale of new homes and in the stock of homes available for sale. The volume of new mortgages taken out remains high.
The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high and the risks to growth have increased. 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 November 2015 will be published on November 9, 2015.
The decision regarding the interest rate for December 2015 will be published at 16:00 on Monday, November 23, 2015."
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