Bank of Israel Retains 0.1% Key Interest Rate

December 26, 2016

Israel’s policy interest rate has been 0.1% since a 15 basis point cut in February 2015. The rate previously had dropped from 3.25% to 0.25% during 2011-14. The Bank of Israel released a formal statement and remarks from Governor Flug justifying the need for the accommodative stance and explaining how Israel’s economy reflects the United States in terms of growth but Europe from the standpoint of inflation.

In terms of real activity, the Israeli economy’s business cycle is more in line with that of the US economy; in contrast, the picture of inflation in Israel is similar to that in Europe. It is important to note that the Bank of Israel’s monetary policy does not necessarily move in line with what is occurring in a specific economy, but is established through analysis of the range of developments and their impact on the Israeli economy and financial markets in Israel. …While economic activity in Israel is becoming entrenched, and the labor market continues to show strength, the inflation environment is still low and the inflation rate is markedly lower than the target.

The Bank of Israel’s policy in the foreign exchange market is not intended to act against fundamental forces, but it does moderate the forces for appreciation and buys time for exporters to make the adjustments for long term changes in export markets, which at times are seen rapidly in the currency markets. Thus, the policy supports the recovery of exports, and is an integral part of monetary policy.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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