Interest Rate to Hold Steady in July


One of Stanley Fischer’s last decisions as Governor of the Bank of Israel was taken on Monday as the monetary committee announced that the interest rate for July will remain unchanged at 1.25%.

Most analysts had forecast this decision after the Bank of Israel lowered the interest rate by 50 basis points in two separate decisions during May.

The Bank of Israel explained the main considerations in keeping the rate unchanged were, “Inflation expectations for the coming year, based on various sources, are near the midpoint of the inflation target, ranging from 1.7% to 2%. The actual increase in prices over the past 12 months is near the lower band of the target range, but is expected to rise to the center of the target by July, primarily due to the VAT rate increase.”

The Bank added, “Indicators which became available in the past month point to the possibility that there has been a slowdown in the growth rate of economic activity in recent months. The two reductions in the interest rate in the past month provide, at this point, a response to the developments derived from those indicators. The Research Department’s updated growth forecast for 2013 remained unchanged, while the forecast for 2014 was revised downward primarily due to the fiscal program which was approved to deal with the budget deficit.”

“The Federal Reserve recently announced an expected removal of policy accommodation in the future, subject to the continued improvement in macroeconomic conditions in the U.S. Against this background, bond yields rose in the U.S. This increase, should it continue, is likely to moderate the forces for appreciation of the shekel. The expansionary policy of major central banks, reflected in low interest rates and quantitative easing programs, continues for now.”