Bank of Israel Policy Looks to Keep Low Interest Rates

Central bank will maintain expansionary monetary policy, likely continue with dollar purchases.

Olivier Fitoussi

Israel is likely to keep its expansionary monetary policy for a while, meaning interest rates in Israel will stay low even if the United States raises rates further, the Bank of Israel stated in its monetary policy report for the second half of 2015.

Dollar purchases are also likely to continue as part of this policy, it added.

The central bank’s expansionary monetary policy is characterized mostly by Israel’s record-low interest rates. The central bank’s representative rate has been 0.1% for months, the lowest in Israel’s history.

As of December 2015, inflation had been a negative 1% for the previous 12 months. After adjusting for the direct impact of energy prices and government changes such as the cut to VAT, inflation increased 0.6% for the year. This figure is still lower than the government-set inflation target of between 1% and 3%.

Analysts predict that inflation will be below the target range this year as well, but over the next five years or more, inflation is expected to work out to 2% or a bit less.

The bank found that Israel’s economy returned to the slow pace of expansion that has characterized it for the past two years. It believes that exports and local economic activity were improving by the end of 2015.

Regarding the shekel exchange rate, the bank stated that in the nominal effective exchange rate – which calculates the value of the shekel in regard to the currencies of Israel’s main trading partners – the shekel remained stable between July and December. The shekel lost 2% in value vis-à-vis the dollar, while gaining 1% vis-à-vis the euro during that period. The bank said there are several models that indicate the shekel is overvalued.

The report also touched on the housing market. It stated that in terms of the volume of new mortgages and the number of transactions, the market peaked during the period under review. Yet the relative risk of the new mortgages remained low, as a result of the former banks commissioner’s oversight measures. However, the banks’ mortgage portfolios are still the riskiest part of all the banks’ loans, it noted.