The decision to keep the interest rate for December 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, as well as in monetary policies of major central banks, the Monetary Committee assesses 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-off nature. Short-term inflation expectations remained low this month, and are affected by these factors and by the recent renewed decline in commodity prices. Medium-term (forward) expectations declined slightly after increasing in the previous month, and long-term (forward) expectations remained entrenched near the midpoint of the target range.
• The first estimate of third quarter growth data indicates a return to the rate of growth that prevailed in the past two years, without compensation for the near-zero growth in the second quarter. The rate of growth in nondurable goods consumption was maintained, there was an acceleration in public consumption, and after a prolonged period of time there was a recovery in exports. However, the most recent data indicate that the improvement in exports may have been transitory. The picture presented by labor market data continues to be positive. To date, the effect of the wave of violence on economic activity is moderate.
• This month, the OECD again reduced its global growth forecast, against the background of the weakness in world trade and the slowdown in developing economies. Global financial market expectations are that the US Federal Reserve will begin to increase the federal funds rate soon, but that in Europe and other major economies, monetary accommodation will be enhanced.
• From the monetary policy discussion on October 25, 2015, through November 20, 2015, the shekel strengthened by about 1.6 percent in terms of the nominal effective exchange rate, as the shekel was stable against the dollar and appreciated relatively sharply against the euro. Since the beginning of the year there has been an effective appreciation of 7.5 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.
• The volume of new mortgages taken out remains elevated, as do new home sales and the stock of homes available for sale. Home prices have increased by 6.6 percent over the past 12 months. However, prices have been stable over the past two months.
The Monetary Committee is of the opinion that the risks to achieving the inflation target and to growth remain high. 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.
For full Bank of Israel statement, please click here.