By CentralBankNews.info
Israel’s central bank maintained its key policy rate at 0.10 percent but said “uncertainty regarding the implications of the Brexit, and the continued decline of exports in recent months” strengthens the view that monetary policy will remain accommodative for a considerable time.
The Bank of Israel’s (BOI) guidance of keeping its monetary policy stance “accommodative for a considerable time” is the same as in recent months but the central bank added today that that risks to achieving its inflation target and to economic growth have risen.
Last month the BOI, which has kept its key rate unchanged since cutting it by 15 basis points in February last year, said risks to achieving its inflation target “remains high” while risks to growth have increased.
Noting the sharp reaction of global financial markets to last week’s vote by Britain to pull out of the European Union (EU), the BOI said it was still too early to asses whether the short-term effects on financial markets had run its course as uncertainty is expected to continue in coming months while the monetary policy of major central banks is expected to remain “very accommodative.”
Israel’s inflation rate rose slightly to minus 0.8 percent in May from minus 0.9 percent in April and the BOI said there was a slight increase in one-year inflation expectations while the rapid rise in wages and continued increase in private consumption will support the return of inflation to the bank’s target range of 1-3 percent in a bout a year.
In an update to its quarterly forecast, BOI staff projected that inflation this year will average 0.0 percent, up from minus 0.9 percent in 2015, and then 1.2 percent in 2017.
In March BOI staff forecast inflation this year of 0.2 percent and 1.4 percent in 2017.
Economic growth is forecast to average 2.4 percent this year, below last year’s 2.5 percent, and then rise to 2.9 percent in 2017, with private consumption up by 4.3 percent this year before easing to 2.8 percent next year.
In March the BOI forecast economic growth of 2.8 percent this year and 3.0 percent in 2017.
In the first three months of this year, Israel’s Gross Domestic Product grew by an annual rate of 1.7 percent, down from 2.1 percent in the previous quarter. Although this level of growth is seen as low, the BOI said it still shows growth at a level that characterized in the past few years.
“The decline in exports is concentrated in a number of industries that were affected by factors, some of which are not expected to persist, and private consumption continues to lead growth, supported by the low interest rate and the increase in wages,” the BOI said.
The Bank of Israel issued the following statement with the main considerations underlying its decision:
“The decision to keep the interest rate for July 2016 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. Uncertainty regarding the implications of the Brexit, and the continued decline of exports in recent months, strengthen the Monetary Committee’s assessment that 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, monetary policy will remain accommodative for a considerable time.