Bank of Israel in Pause Mode with Lessening Urgency to Tighten

August 29, 2011

From a low of 0.5% prior to August 2009 when the Bank of Israel became the first central bank anywhere to tighten after the Great Recession, ten rate hikes had been implemented by May of this year.  Today, the Bank of Israel decided to extend its three-month policy pause at least for another month and released a statement that is bound to reinforce the mounting belief among analysts that no further increase will be implemented over the coming year.

The key Israeli rate is now at 3.25% after increases totaling 75 basis points each in 2009 and 2010 and 125 bps in the first five months of 2011. 

Israeli monetary policy would have likely been left unchanged even if global financial market turbulence had not intensified during the past month.  The statement points out that expected inflation fell abruptly in August to 2-2.5% according to various measures.  Actual inflation dropped much more sharply than expected to 3.4% in July from 4.2% in June and 4.1% in May.  Officials had been assuming inflation would not settle below the 3% target ceiling until mid-2012 but now project that timing will occur later this year.  House price inflation slowed to 12.5% in June from 15.3% a couple of months earlier, and it’s been confirmed that sharply slower export and personal consumption growth dampened overall GDP expansion in the second quarter (3.3%), which was lower than in the first quarter.

The statement also makes note of changes in other economies.  “Developments since the previous interest rate decision indicating a negative turnaround in economic activity in the US and the eurozone, together with the geopolitical risks, are likely to affect economic activity in Israel.”  And officials point out that markets presently are not pricing in any monetary tightening over the coming year in the main advanced economy central banks.  As noted, more and more analysts are concluding that the Bank of Israel may also sit tight well into 2012.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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