Interest Rates for February Will Hold Steady

Most market analysts believe that the Bank of Israel will not make any changes to its own policies before the new government clarifies its plans for the 2013 and 2014 budgets.

The base interest rate will remain unchanged in February, holding steady at 1.75%, the Bank of Israel announced at the close of trading Monday night.

The decision is consistent with the Bank’s policy to stabilize prices with a targeted inflation rate of 1%-3% for the next 12 months. The Bank’s goal is to support growth while ensuring financial stability. Future interest rates will depend on actual inflation rates, on global and local growth, and on the monetary policies of major central banks, as well as on developments in currency exchange rates.

Most market analysts are of the opinion that, following recent elections, the Bank of Israel will wait until a new government is formed and new policies, including those on taxation, are formulated before announcing any changes in its own policies.
Bank officials believe that with the incorporation of Yair Lapid’s Yesh Atid party into the new coalition, the previous government's economic policies will continue. These have broad support from the Governor of the Bank and its monetary committee.

Analysts believe that if the Bank does opt to reduce interest rates again, it will only happen in a few months, once the government is in place and its budgetary priorities for 2013 and 2014 have been clarified.

The Bank is also waiting for the new government to decide on how it will tackle the need to slash NIS 15 billion from the expense column of the budget, along with raising NIS 5 billion in tax revenues. Senior officials at the Bank and the Treasury have held recent meetings to discuss spending cuts and the new taxes that will be required for the next budget.

Analysts argued last week that as long as housing prices are on the rise, as has been the case for several months now, the Bank will find it difficult to continue cutting interest rates. However, Israel’s growth rate has slowed down in the last two months, unemployment has risen and exports have fallen. This will translate into increased pressure to reduce interest rates in the coming months.

Forecasters estimate that financial indices for the first quarter of 2012 will be very low, with some even hitting negative territory. This will show up at the end of the first quarter of 2013 as a lower inflation rate of around 1% for the preceding 12 months.

At the end of December, this figure stood at 1.6%, with the Bank’s target for annual inflation rates set at 1% to 3%. Most analysts estimate that the 2012 inflation rate will end up in the middle of this range, at 2%.

Tomer Appelbaum