The Bank of Israel caught the money market experts flatfooted on Monday, leaving the interest rate unchanged, when a cut was expected.
The BOI Monetary Committee, headed by Governor Dr. Karnit Flug, kept the rate for November at 0.25%. Analysts had predicted a cut of the rate, which is already at a historic low, by 0.10-0.15%. This marks the second consecutive month that the bank has left the rate unchanged after cuts in August and September, Globes reported.
The BOI hinted that it would use other means to stimulate economic growth such as a quantitative easing plan: “The Monetary Committee is of the opinion that the effects of the recent interest-rate reductions, which brought the interest rate to a level of 0.25%, have not yet been fully reflected in activity and in inflation, and in light of that decided to keep the interest rate unchanged this month.”
To explain its decision, the Bank said, “The inflation environment continued to decline this month. The inflation rate measured over the preceding 12 months was negative 0.3%. Inflation expectations for the coming year, from various sources, declined to below the lower bound of the inflation target range, and two-year expectations are at the lower bound. Expectations for longer terms declined as well, though they are near to the midpoint of the target range.”
Regarding the turnaround in the dollar-shekel exchange rate: “In light of the reductions in the Bank of Israel interest rate, and the strengthening of the dollar worldwide, the shekel weakened by 2.8% this month in terms of the nominal effective exchange rate, and it has weakened by about 4.1% since the beginning of the year. Continued depreciation will support a recovery in exports and in the tradable sector as a whole, and is expected to contribute to returning the inflation rate to within the target range.”
Stagnation in the housing market was noted, as well. “The sharp decline in the number of transactions in the housing market continues, and there is a moderation in the rate of mortgages being taken out. Home prices declined by 1% in July-August, and their rate of increase over the 12 months ending in August slowed to 5%. It is difficult to assess the response that will occur when the uncertainty regarding the zero-VAT law is removed.”