The decision to reduce the interest rate to 2.5 percent for February 2012 is consistent with the interest rate policy that is intended to entrench the inflation rate within the price stability target of 1-3 percent inflation a year over the next twelve months, and to support growth while maintaining financial stability.

 Bank of Israel reduces interest rate to 2.5 percent

 

(Communicated by the Bank of Israel)

The decision to reduce the interest rate to 2.5 percent for February 2012 is consistent with the interest rate policy that is intended to entrench the inflation rate within the price stability target of 1-3 percent inflation a year over the next twelve months, and to support growth while maintaining financial stability. The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel, the global economy, monetary policies of major central banks, and developments in the exchange rate of the shekel.

The following were the main considerations underlying the decision:

The indicators that became available this month show that the slowdown in activity and in demand that started during the second half of 2011 continues. The slowdown in growth of Israel’s economy is seen in exports and in domestic demand, against the background of weakness in the global economy and the significant uncertainty existing in the global environment, primarily around Europe. In addition, surveys of expectations, both of consumers and companies, show that the slowdown in the rate of growth is expected to continue. 

Actual inflation over the previous twelve months continues to settle firmly within the target range. Inflation figures indicate a marked slowdown in inflation in the second half of 2011. The Bank of Israel expects the rate of inflation over the previous twelve months to remain within the target inflation range in 2012. Forecasters’ inflation predictions for the coming twelve months and inflation expectations measured from the capital market are close to the midpoint of the target range.

Data on economic activity in Europe are consistent with the assessments that the eurozone will slip into a recession in 2012. Figures of actual global trade show a continued volume decline in October. Forecasts for world trade growth in 2012 were revised downward. The risk of default of some European countries as reflected by the high yields on their bonds and their high CDS spreads were expressed this month in the downgrading of the sovereign credit rating of major European economies. Some optimism has been evident recently in global financial markets, primarily against the background of steps taken by the ECB, but uncertainty regarding the debt crisis remains high, which also affects the level of uncertainty about developments in the Israeli economy.

Interest rates in the major economies are low, and the markets are not pricing in an increase in the interest rate in the coming year in any of the central banks of the large advanced economies. The Fed, it will be recalled, declared that the federal funds rate will remain at a near-zero level till mid-2013 at least. The Bank of England and the ECB continued their efforts to increase liquidity.

Home prices continued to decline at a moderate pace. The limitation that the Bank of Israel imposed relating to the permitted share of housing loans at floating interest rates reduces the effect of cuts in the Bank of Israel interest rates on the average interest rate on mortgages. 

The decision to cut the interest rate to 2.5 percent for February is consistent with the interest rate policy aimed at keeping inflation within the price stability target range and is intended to support real economic activity, against the background of the slowdown in global demand.

The Bank of Israel will continue to monitor developments in Israel’s economy and the global economy and in financial markets. The Bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, including keeping a close watch on developments in the asset markets.