Bank of Israel Still Optimistic About 2012, but Not 2013

Fischer leaves interest rates unchanged.

Economic growth next year will be lower than originally forecast, but this year will turn out to be slightly better than expected, the Bank of Israel's research department said on Monday - while leaving October interest rates unchanged at 2.25%.

The central bank's forecasts are for 3.3% growth in GDP for 2012, compared with its previous estimate of 3.1%; but only 3% growth next year, down from its earlier forecast of 3.4%. The main cause of the changes is more the forecast for the gloabl economy and less so local conditions; though this year's numbers were upgraded as the previous forecasts turned out to be overly pessimistic.

"The revision is mainly the result of a positive surprise in GDP growth data during the first half of the year, mainly influenced by exports, which was partially offset by a more pessimistic outlook for the second half of the year," wrote the central bank.

As to the 2013 forecast, the researchers wrote: "The forecast has been revised downwards against a backdrop of a continued global slowdown and the tax steps taken by the government, which are intended to contribute to the stability of the economy." A slowdown in both imports and exports is expected, as well as a drop in investments. Only public consumption is expected to increase next year. Inflation is forecast to run at a 2.6% pace over the next year.

The Bank of Israel's monetary committee decided to leave October interest rates unchanged at 2.25%, the central bank announced yesterday evening. The central bank based its decision on its updated economic forecasts - and including the unexpected high rate of inflation for August and the continued rise in mortgage loans and housing prices. The global economic situation seems particularly to worry the central bank: "The level of economic risk from around the world remains high, and with it the concerns over negative effects on the local economy. Real economic data around the world continue to indicate weakness."

Based on the higher inflation expectations and lower economic growth, the Bank of Israel seems to have decided to wait for further developments, both locally and globally before deciding whether to change interest rates. "The path of the interest rate in the future 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," stated the announcement.

The Manufacturers Association was disappointed by the interest rate decision. The Bank of Israel must lower rates in light of the credit crunch affecting the entire economy, but particularly small and medium-sized businesses and improve the competitiveness of the Israeli economy, said Michael Sharan of the Association.