The rumored cut comes amid the on-going Gaza conflict and the shekel trading at long term highs against the dollar and euro (12-year low against the shekel). The move ensures the economy keeps humming along with inflation not a significant threat generally and also in a bid to stem the stubborn strength in the currency, which makes exports less attractive. In its latest release The Economist magazine’s Big Mac index ranked the shekel as the world’s eighth most overvalued currency.
Check out below an official statement from the Bank of Israel which describes their main considerations:
The decision to reduce the interest rate for August 2014 by 0.25 percentage points, to 0.5 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 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 and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel.
Concurrently the Bank has decided to narrow the interest rate corridor in the credit window and the commercial bank deposit window from ±0.5 percent to ±0.25 percent.
The following are the main considerations underlying the decision:
- There was a decline in the inflation environment this month. Inflation measured over the preceding 12 months declined, as expected, to a level of 0.5 percent, below the lower bound of the target range. The CPI excluding the housing component declined by 0.2 percent over that period. Since the April CPI was published, there has been a decline in inflation expectations for all terms, and short-term expectations approached the lower bound of the target range.
- Indicators of real economic activity which became available this month indicate continued moderate growth, similar to previous quarters. With that, they refer to the period before the deterioration of the security situation; its moderating effect cannot yet be estimated. Weakness continues in goods exports, against the background of the virtual standstill in world trade and the cumulative appreciation, with moderation in high technology exports. Weakness is also apparent in private consumption over recent months. Labor force survey data indicate stability, and the growth in the number of employee posts has halted.
- The shekel strengthened by 0.8 percent this month in terms of the nominal effective exchange rate, and has appreciated by about 2 percent for the year to date. The real exchange rate is at a level that weighs on growth in the tradable industries—exports and import substitutes, particularly in light of the virtual standstill in world trade.
- This month, the IMF again reduced its global growth and world trade forecasts for 2014, while leaving the 2015 projections unchanged. In Europe, against the background of continued low inflation, the ECB reiterated its commitment to accommodative monetary policy for an extended period of time, and in the US the tapering process continues, while the assessment remains that the federal funds target rate will not be increased until the middle of 2015.
- Home prices continued to increase in April–May, and the rate of new mortgages taken out remained elevated, while the risk characteristics of those mortgages continued to decline due to steps taken by the Supervisor of Banks. The number of housing transactions declined sharply. Corporate bond spreads continued to widen, but they are still at a low level. This month, there were net withdrawals from corporate bond mutual funds.
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 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.
To view the official report, click here.