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Economic Weekly

July 30, 2014

 

The Bank of Israel cut its interest rate 25bps to 0.5%. What were the main reasons for the cut?

The monetary committee of the Bank of Israel (BoI) decided on July 28th to lower its interest rate for August from 0.75% to 0.50%. This is a very low interest rate, equal to the historical low level set in April 2009 against the backdrop of the global economic crisis.

 

According to the interest rate announcement, the main reasons for this decision include: a decline in the inflation rate over the trailing 12-month period to 0.5% (below the lower border of the price stability target range), and also a decline in inflation expectations across all ranges, in continuation of the trend from recent months; the continuing trend of moderate economic growth against the backdrop of the weakness in goods exports and private consumption; the continuing trend of appreciation in the exchange rate of the shekel vis-à-vis the currency basket, which reduces the competitiveness of Israeli goods and services overseas; a cut in global growth forecasts, as well as in global trade, for 2014, while the forecasts for 2015 remain unchanged; continuing expansionary monetary policy in Europe over time, while the US interest rate is expected to increase only in mid-2015; and a continuing increase in housing prices against the backdrop of a continuing high rate of new mortgage grants. However, the central bank noted in its announcement that in recent months there has been a substantial decline in the number of housing transactions; and spreads in the corporate bond market have widened, but they are still at low levels that reflect risk.


 

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