Bank of Israel Keeps August Base Rate Unchanged at 2.25%

Analyst: Among 'the most pessimistic' decisions in recent times.

The Bank of Israel will keep August interest rates unchanged at 2.25%, noting that Israeli economic growth in the first half appeared to have stabilized at just under 3% - a reasonable performance.

The central bank announced the decision of its Monetary Committee, headed by governor Stanley Fischer, after the Tel Aviv Stock Exchange had closed on Monday. It's keeping rates flat despite the surprising 0.3% drop in consumer prices in June.

The benchmark interest rate started the year at 2.75%, sat at 2.5% from February through June and was cut to 2.25% last month. The benchmark rate was 3.25% in August 2011.

The Bank of Israel said its interest rate policy is intended "to entrench the inflation rate within the price stability target of 1% to 3% a year over the next 12 months, and to support growth while maintaining financial stability."

According to the bank, the interest rate's direction "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," it said in a statement.

The Bank of Israel cited five main reasons for its decision to hold rates stable for August. In addition to keeping inflation within the target range, it noted that the increase in the housing component of the consumer price index over the past year had moderated or stopped.

In addition, Israeli economic growth during the first half appears to have stabilized at just under 3%. Economic developments in Europe deteriorated further in July, and further signs of slowing global growth appeared as well. Another factor: Several central banks reduced interest rates in July.

Against the background of the previous month's interest rate cut and the shekel's recent weakness, which are expected to help the Israeli economy, the Monetary Committee left rates unchanged, the Bank of Israel said.

It added that it "will continue to monitor developments in the Israeli and global economies and in financial markets, particularly in light of the increasing uncertainty in the global economy.

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."

According to the bank, in this regard, it will "keep a close watch on developments in the asset markets, including the housing market."

The minutes of the Monetary Committee's discussion of the interest rate decision will be published two weeks from now.

Too pessimistic for some

Not everyone was pleased with Fischer's decision. "It was one of the most pessimistic interest rate announcements in recent times," said DS Apex chief economist Alex Zabezhinsky. "Most points the Bank of Israel raised in its announcement support a continued lowering of interest rates."

According to Golan Sapir, deputy CEO of Sigma Investment House, "The Bank of Israel is debating between the depth of the slowdown that we will experience due to the crisis in Europe and the weakness in the United States, against the strengthening of the dollar and the price [of goods] denominated in dollars - first and foremost oil."

The president of the Lahav Israel Association of the Self-Employed, Yehuda Talmon, said the Bank of Israel should have lowered rates. "The latest figures point at a continued slowdown," he said.

"This month the export figure stood out in a bad way, and there was another rise in the trade deficit, in addition to a sharp drop in the inflation data. It seems the slowdown trend is expected to worsen in the near term as the world economy weakens."

In a similar vein, Yehuda Elhadef, president of the Israel Crafts and Industry Association, said small and mid-size businesses sought lower rates as a way out of the credit crunch.

Stanley Fischer
Daniel Bar-On