Bank of Israel Didn’t Ease Further

March 23, 2015

Monetary officials implemented three 25-basis point cuts each in Israel’s Bank Rate in 2011, 2012, 2013, and 2014 and an additional 15-basis point reduction at the previous month’s meeting in February.  Opinions were mixed about what action might be taken after the March meeting, ranging from adoption of a negative interest rate as several other central banks have done to launching a program of quantitative stimulus to letting the month pass without taking any new steps.  The option of doing nothing further at this time was chosen.  Only two cuplets in the previous 15 easings occurred consecutively.  The central bank rate was cut twice in May 2013, two weeks apart, and at back-to-back meetings in July and August of 2014.  Experience shows a preference for avoiding the predictability of going every meeting, a tradition established by the former Bank Governor, Stanley Fisher, who now as the Federal Reserve Vice Chairman is likewise predisposed to less predictability and less forward guidance than many of his colleagues.

A statement released today by the Bank of Israel attributes a bigger on-year 1.0% decline of consumer prices in February to plunging energy costs and suggests that the 12-month rate of decline is likely to be 1.5% soon.  That would be 2.5 percentage points below the floor of the central bank’s 1-3% long-term inflation target.  With GDP projected to climb 3.2% this year and 3.5% in 2016, officials believe that without changing the 0.1% bank rate, inflation a year from now would be back at the target floor of 1.0%.  Long-term inflation expectations are hovering around the target midpoint.  Also noted are a rising trend in home prices and a 1.9% trade-weighted drop in the shekel in the four weeks since the February monetary policy meeting.  Quantitative easing or adoption of a sub-zero central bank rate can probably not be ruled out as future decision possibilities, although the statement does not explicitly discuss the issues.  Forward guidance is rather expressed in much more general terms: “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.”

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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