Bank of Israel (BOI), Israel's central bank left its benchmark interest rate for August 2015 at 0.10%, noting the recent decline in energy prices along with the appreciation of the shekel "are liable to defer the return of the inflation rate to within the target range."
Israel's inflation rate was steady at minus 0.4% in June and May, with the BOI saying the rate of increase during the March to June period was consistent with achieving its inflation target of 1.0 to 3.0%.
However, measured over the last 12 months, the BOI added that inflation is expected to remain negative "for several more months" and the fall in energy prices that resumed in the last month along with the rise in the shekel was likely to postpone the return of inflation to the target range.
The BOI said short-term inflation expectations from various sources remained around the lower bound of its target range in the last month while private forecasters projections for the next 12 months are for an increase of 1% on average. Twelve-month inflation expectations from markets are currently 1.0% and expectations for 2 years are 1.3%.
The following are the additional considerations underlying the decision: Indicators of real economic activity that became available this month point to the economy continuing to grow at its moderate rate of recent years, led by private consumption and with a decline in exports.
The second quarter Companies Survey supports this assessment. The Composite State of the Economy Index increased by 0.4% in June, and was positively affected by an increase in imports and in the job vacancy rate, but declines in goods exports and in industrial production were notably negative components. Labor market data continue to indicate a high level of employment and activity.
The shekel strengthened by 2.5% in terms of the nominal effective exchange rate this month, and has appreciated by 7.1% for the year to date, primarily as a result of the weakening of the euro. The appreciation, and the moderation in growth of world trade, weigh on the growth of exports and of the tradable sector. Robust activity in the housing market, both on the supply side and on the demand side, continued this month, and was reflected in a record level of new mortgage volume, and an especially elevated level of new home sales. In the past 12 months, home prices have increased by 3.2%.
The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets. 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.
